ADVANCEL 
ACCOUNTING  PROb   EMS 


WITH  EXPLANATORY  NOTES 


CHARLES  F.  RITTENHOUSE,  B.  C.  S.,  C.  P.  A. 


AND 


PHILIP  F.  CLAPP,  B.-C.S. 


Digitized  by  the  Internet  Archive 

in  2007  with  funding  from 

Microsoft  Corporation 


http://www.archive.org/details/advancedaccountiOOrittrich 


ADVANCED   ACCOUNTING 

PROBLEMS 

With  Explanatory  Notes 


PREPARED  BY 

CHARLES  F.  RITTENHOUSE,  B.  C.  S.,  C.  P.  A. 

AND 

PHILIP  F.  CLAPP,  B.  C.  S. 


ASSOCIATION  PRESS 

124  East  28th  Street,   New  York 
1917 


■ 


9? 


Copyright,  1917 

BY 

Frederick  M.  Harris 


INDEX 

PAGE 

PART  I :           Partnership  Accounts — Problems  1  to  25   1 

PART  II :         Corporation  Accounts — Problems  26  to  31 16 

PART  III:       Mergers,  Reorganizations,  Holding  Companies  and  Consolidations — Problems  32 

to  47  22 

PART  IV :        Bond  Issues  and  Sinking  Funds — Problems  48  to  58 38 

PART  V :         Receiverships  and  Bankruptcy — Problems  59  to  67 48 

PART  VI :        Accounts  of  Trustees  and  Executors — Problems  68  to  76 65 

PART  VII :      Branch  Houses,  Selling  Agencies,  and  Consignments — Problems  77  to  82 72 

PART  VIII :     Manufacturing  and  Cost  Accounts — Problems  83  to  87 76 

PART  IX :        Foreign  Exchange— Problems  88  to  100 80 

PART  X :         Equation  of  Accounts — Problems  101  to  1 10 86 

PART  XI :        Special  Investigations — Problems  111  to  113 90 

PART  XII :      Miscellaneous— Problems  114  to  118 93 


12632 


PART  I 
PARTNERSHIP  ACCOUNTS 

While  the  accounting  problemfe  peculiar  to  partnerships  offer  no  principles  that  are  'essentially  new,  yet 
in  no  branch  of  accounting  does  the  application  of  those  principles  require  any  more  complete  knowledge  of 
all  details  and  more  accurate  and  logical  reasoning  in  order  to  arrive  at  equitable  results.  In  fact,  part- 
nership adjustments  and  liquidations  as  a  rule  require  more  of  the  mathematical  ability  to  do  abstract  reason- 
ing than  a  technical  training  in  accounting.  In  other  words,  most  partnership  problems  would  be  easily 
possible  of  solution  if  one  did  not  understand  even  the  meaning  of  debit  and  credit. 

A  knowledge  of  the  general  principles  of  partnership  law  is  essential  to  the  proper  handling  of  problems 
arising  from  partnership  affairs.  Partnerships  are  the  oldest  form  of  association  for  business  purposes 
and  as  they  are  organized  under  the  common  law,  no  statutory  requirements  must  be  complied  with  as  is 
the  ease  in  organizing-  a  corporation.  As  these  agreements  are  often  made  orally  and  by  implication,  there 
is  no  written  record  of  the  understanding  between  the  partners  as  to  how  the  affairs  are  to  be  administered 
or  as  to  the  respective  interests  of  the  partners  in  the  business.  Even  when  the  agreement  is  in  writing,  the 
terms  thereof  are  often  vaguely  and  incompletely  expressed,  leaving  certain  essential  things  to  be  implied 
or  to  be  settled  by  the  courts.  These  circumstances  have  given  rise  to  numerous  legal  decisions  pertaining 
to  partnership  affairs  which  form  the  basis  of  settlement  in  all  disputed  cases.  An  -attempt  will  be  made 
in  these  notes  to  discuss  the  general  principles  underlying  partnership  accounts  as  deduced  from  law  and 
practice  and  to  illustrate  these  principles  by  concrete  cases. 

Division  of  Profits 

In  the  absence  of  any  agreement  between  the  partners  as  to  how  profits  shall  be  shared,  the  law  will 
give  each  partner  an  equal  share.  By  agreement  between  partners,  profits  may  be  shared  in  any  one  of 
the  following  ways : 

1.  In  proportion  to  the  amount  of  capital  originally  contributed. 

2.  In  proportion  to  the  ratio  existing  between  the  capital  accounts  at  the  time  of  dividing  profits. 

3.  In  any  proportion  agreed  upon,  regardless  of  original  investment  or  whether  a  certain  partner 
nade  any  investment.  ...... 

Losses  are  always  borne  in  the  same  proportion  as  profits  are  shared. 

Interest  of  a  Partner  in  the  Partnership 

The  interest  of  a  partner  at  any  time  is  represented  by  his  investment  less  drawings  plus  his  share  of 
the  profits,  or  minus  his  share  o*f  the  losses. 

It  is  always  necessary  to  distinguish  between  the  division  of  profits  and  a  share  in  the  partnership 
assets.  The  division  of  profits  as  has  been  stated  Is  always  in  accordance  with  the  terms  of  the  partner- 
ship agreement,  or  equally,  if  there  was  no  agreement  on  that  point;  the  share  of  a  partner  in  the  partner- 
p  assets  is  always  determined  by  his  Capital  account,  either  standing  alone  or  in  conjunction  with  his 
Drawing  or  Current  account. 

ounts  with  Partners 

There  are  different  accounts  which  may  be  kept  with  partners  and  different  methods  of  handling  them, 
as  follows: 

1.  The  Capital  account  of  each  partner  may  be  credited   with   the   investment,  and   with   the  proper 
c  of  the  profits,  and  debited  with  the  drawings  and  with  the  proper  share  of  the  losses;  in  other  words, 

only  one  account  may  be  kept  with  each  partner. 

2.  A  Capital  account  may  be  kept  with  each  partner  and  credited  only  with  the  original  investment 
and  with  any  permanent  additions  thereto.  If  the  desire  is  to  keep  this  account  intact,  it  is  necessary  to 
open  a  separate  Drawing  or  Current  or  Personal  account  with  each  partner,  charging  such  an  account 
with  the  drawings  and  with  the  net  loss  and  crediting  it  with  profits.  At  the  close  of  the  fiscal  period,  the 
Drawing  account  would  be  balanced  and  the  balance  carried  forward  into  the  next  period.  In  case  the 
accounts  are  kept  in  this  way,  the  net  worth  of  a  partner  is  determined  by  combining  the  balance  of  the 

tal  account  with  the  Drawing  account. 


3.  Where  there  is  no  desire  to  keep  the  original  investment  intact,  a  Capital  and  a  Drawing  account 
may  be  kept  with  each  partner  as  explained  above,  and  the  balance  of  the  Drawing  account  closed  into 
the  Capital  account  at  the  end  of  a  fiscal  period. 

4.  If  it  is  agreed  that  each  partner  shall  be  credited  periodically  with  his  salary  allowance,  a  third 
account  should  be  kept,  called  a  Salary  account.  This  account  would  be  credited  periodically  with  the  salary 
allowance  and  charged  with  all  drawings  against  the  same.  If  the  partners  so  desire,  the  salary  accounts 
may  be  left  open  from  year  to  year,  the  undrawn  or  overdrawn  balance  being  carried  forward  into  the 
succeeding  year.  Such  balances  should  be  shown  in  the  Balance  Sheet  under  Accounts  Receivable  or  Pay- 
able and  not  as  a  part  of  the  net  worth. 

Each  partner  who  gives  all  or  any  portion  of  his  time  to  the  business  should  receive  a  salary  allowance 
which  should  be  debited  in  monthly  instalments  to  the  proper  expense  account  and  credited  to  the  Draw- 
ing account  of  the  partner,  or  better,  to  a  Salary  account  as  suggested  above.  It  is  only  in  this  way  that 
a  proper  charge  is  made  against  profits  covering  the  necessary  expense  of  managerial  services ;  conse- 
quently, the  net  profits  arrived  at  if  partners'  salaries  are  not  considered  wtould  not  reflect  the  true  result  of 
the  business  operations. 

As  explained  hereafter,  if  interest  is  to  be  allowed  on  capital  invested  in  the  business  and  charged  on 
drawings,  the  proper  credits  and  charges  on  account  of  interest  should  be  to  the  Drawing  account  if  one  is 
kept ;  otherwise,  to  the  Capital  account. 

If  profits  or  losses  are  to  be  distributed  on  the  basis  of  the  original  investment  it  becomes  necessary 
to  keep  a  separate  Drawing  or  Current  account  with  each  partner,  the  balance  of  which  should  not  be  closed 
into  the  Capital  account. 

If  profits  or  losses  are  divided  in  some  fixed  proportion  it  is  optional  Whether  we  carry  forward  the 
balance  of  the  Drawing  account  into  the  next  period  or  close  it  into  the  Capital  account. 

If  profits  are  shared  on  the  basis  of  the  partnership  interest  in  the  business  at  the  time  of  closing  the 
books,  the  Drawing  accounts  should  be  closed  into  the  Capital  accounts. 

Admission  of  a  Partner 

(From  Hatfield's  "Modern  Accounting") 

A  certain  Balance  Sheet  shows: 

BALANCE  SHEET 

Merchandise $5,000        Capital  Account $5,000 

The  trader  agrees  to  admit  B  and  give  him  one  half  of  the  profits  if  he  contributes  $6,000.  This  done, 
the  Balance  Sheet  shows : 

BALANCE  SHEET  OF  A  AND  B 

Merchandise $5,000         A,  Capital  Account $5,000 

Cash   6,000         B,  Capital  Account 6,000 


$11,000  $11,000 

The  basis  of  the  division  of  profits  here  differs  from  the  proportion  of  capital  contributed  by  each, 
which  is  legal  and  not  uncomtmon  in  practice.  But  had  the  agreement  been  that  the  contribution  of  $6,000 
by  B  entitled  him  to  a  half  interest  in  the  business  the  accounts  would  need  different  treatment.  The  half 
interest  being  secured  by  a  contribution  of  $6,000  it  implies  that  A,  too,  has  a  similar  interest  of  $6,000  and 
consequently,  accepting  the  valuation  of  the  goods  at  $5,000  as  correct,  that  he  is  construed  as  contributing 
goodwill  of  $1,000  as  well  as  the  merchandise,  thus  giving : 

BALANCE  SHEET  OF  A  AND  B 

Merchandise $5,000         A,  Capital  Account $6,000 

Good  will  : 1,000         B,  Capital  Account 6,000 

Cash    6,000 


$12,000  $12,000 

Similarly  if  the  arrangement  specifies  that  B's  contribution  of  $6,000  gives  him  a  three-fifths  interest 
in  the  business,  NOT  three-fifths  of  the  profits,  and  the  merchandise  still  being  accepted  as  worth  $5,000, 
B  must  be  construed  as  bringing  into  the  firm  business  connections,  or  other  elements  of  Goodwill,  to  such 
a  value  that  his  total  contribution  represents  one  and  one-half  times  the  value  of  A's  merchandise,  or: 


BALANCE  SHEET  OF  A  AND  B 

Merchandise $5,000         A,  Capital  Account $5,000 

Good  will 1,500         B,  Capital  Account 7,500 

Cash 6,000 


$12,500  $12,500 

It  is  also  necessary  to  distinguish  between  one  who  buys,  say,  a  third  interest  in  a  firm  from  the  mem- 
bers of  the  firm  and  one  who  enters  the  partnership  with  a  third  interest.  Thus,  if  A  and  B  are  in  business 
together  with  the  following  showing: 

BALANCE  SHEET  OF  A  AND  B 

Miscellaneous  Assets $60,000        A,  Capital  Account $20,000 

B,  Capital  Account  40,000 


$60,000  $60,000 

C  might,  if  it  were  mutually  agreed  upon,  buy  a  third  interest  in  the  firm   from  B   paying  therefor 
$20,000,  which  would  give  as  the  Balance  Sheet  of  the  new  firm : 

BALANCE  SHEET  OF  A  AND  B  AND  C 

Miscellaneous  Assets $60,000        A,  Capital  Account  .' $20,000 

B,  Capital  Account 20,000 

C,  Capital  Account 20,000 


$60,000  $60,000 

But  if  he  were  admitted  to  the  firm  with  a  one-third  interest,  the  showing,  provided  he  contributed 
the  book  value  of  his  share  in  the  business,  would  have  been  as  follows: 

BALANCE  SHEET  OF  A  AND  B  AND  C 

Miscellaneous  Assets $60,000        A,  Capital  Account $20,000 

Cash   30,000        B,  Capital  Account 40,000 

C,  Capital  Account 30,000 


$90,000  $90,000 

(This  completes  the  quotation  from  Hatfield) 

The  general  principle,  therefore,  to  be  followed  in  problems  involving  the  admission  of  a  partner  is 
as  follows: 

If  a  partner  invests  a  certain  sum  of  money  in  2t  business  with  the  understanding  that  he  is  to  receive 
a  certain  share  of  the  profits,  his  capital  account  would  be  credited  with  the  amount  invested;  but  if  we 
are  asked  to  determine  how  much  a  man  would  have  to  invest  to  give  him  a  certain  interest  in  the  partner- 
ship, say  one-fourth,  the  interest  of  the  other  partner  or  partners  would  represent  three-fourths  of  the 
capital  of  the  new  partnership ;  on  this  basis  we  determine  the  new  capital  and  correspondingly  the  amount 
the  new  partner  would  have  to  invest  to  produce  the  new  capital. 

Interest  on  Partners'  Capital  and  Drawings 

The  charging  of  interest  on  investments  and  drawings  has  a  two-fold  purpose: 

1.  To  determine  the  actual  business  profits  after  allowing  for  a  normal  return  on  the  investment.  In 
other  words,  a  business  is  expected  first  of  all  to  show  a  legitimate  return  on  the  capital  invested;  all 
profits  realized  in  excess  of  the  interest  return  are  regarded  as  the  true  business  profits,  or  as  our  friends 
the  economists  would  say,  as  the  profits  arising  from  entrepreneur  ability. 

2.  To  serve  as  a  means  of  making  an  equitable  adjustment  of  irregular  investments  and  drawings. 
If  interest  is  not  allowed  on  partners'  capital,  the  effect  is  as  follows: 

1.  If  investments  are  equal  and  profits  are  shared  unequally,  that  partner  loses  who  is  entitled  to  the 
smaller  share  in  the  profits.  ^ 

3 


2.  If  profits  are  shared  equally,  investments  being  unequal,  that  partner  loses  who  has  the  larger  invest- 
ment. 

It  follows  that  the  only  circumstances  under  which  neither  would  lose  would  be  in  case  of  profits  Deing 
shared  in  proportion  to  investments,  with  equal  drawings  made  at  the  same  time. 

When  interest  is  allowed  on  each  partner's  investment,  an  adjustment  entry  should  be  made  charging 
Interest  on  Partners'  Capital  and  crediting  the  Capital  account,  or  Drawing  account  of  each  partner  if  a 
Drawing  account  is  kept. 

Interest  should  be  reckoned  on  the  capital  at  the  beginning  of  the  period ;  any  additions  to  capital  made 
during  the  year  would  be  entitled  to  interest  for  the  time  it  was  employed. 

Interest  should  be  charged  on  each  drawing  from  the  date  the  withdrawal  was  made  to  the  end  of  the 
period.  An  adjusting  entry  should  be  made  charging  the  partners'  Capital  or  Drawing  account,  if  one  is 
kept,  and  crediting  Interest  on  Partners'  Capital. 

'In  reckoning  interest  on  capital  and  drawings,  it  is  customary  to  use  a  normal  interest  rate,  commonly 
.five  or  six  per  cent. 

"The  same  net  result,  so  far  as  the  partners'  balances  are  concerned,  may  be  secured  b^  crediting  or 
debiting  interest  on  the  excess  or  deficit  which  each  partner's  contribution  shows  in  relatior/to  the  average 
capital."  Three  partners,  A,  B  and  C,  may  have  invested  $100,000,  $80,000,  and  $60,000  respectively, 
making  a  total  investment  of  $240,000,  the  average  capital  being  $80,000.  A  would  be  entitled  to  interest 
on  the  amount  of  his  investment  in  excess  of  the  average,  or  $20,000 ;  C  would  be  charged  interest  on 
a  deficit  of  $20,000,  while  B,  having  the  average  amount  invested,  is  neither  charged  or  credited  with 
interest. 

Partners'  Loan  Accounts 

If  money  is  advanced  by  a  partner  for  use  in  the  business,  the.  money  thus  advanced  is  regarded  as  a 
loan  and  as  such  should  be  credited  to  a  separate  loan  account  and  not  to  the  Capital  or  Drawing  ac- 
count. The  reason  for  this  is  that  a  loan  has  priority  over  capital  in  case  of  liquidation.  In  other  words, 
in  case  of  a  dissolution  of  the  firm,  the  claims  of  all  trade  creditors  must  first  be  satisfied,  after  which 
a  loan  made  by  a  partner  should  be  paid  together  with  interest  due  thereon.  Following  this,  the  assets 
remaining  for  distribution  are  divided  among  the  partners  in  accordance  with  the  balance  shown  by  their 
Capital  accounts. 

If  interest  on  a  partner's  loan  is  credited  to  the  partner  instead  of  being  paid  in  cash  as  it  comes  due, 
it  should  be  credited  to  the  loan  account  instead  of  to  the  Capital  or  Drawing  account. 

Liquidation  of  a  Partnership 

The  fundamental  principles  to  follow  in  the  liquidation  of  a  partnership  is  that  the  net  assets  remaining 
after  the  payment  of  all  debts  including  partners'  loans  must  be  divided  on  the  basis  of  each  partner's  net 
worth  at  the  time  of  dissolution.  Any  shrinkage  in  the  liquidation  of  book  assets  is  a  loss  which  must 
be  borne  by  each  partner  in  the  same  proportion  in  which  business  profits  or  losses  are  shared.  The  cash 
or  other  assets  remaining  for  distribution  among  the  partners  will  allways  equal  the  combined  net  worth 
of  the  partners. 

If  in  the  sharing  of  losses  or  for  any  other  reason,  a  partner's  capital  account  should  show  a  debit 
balance,  the  cash  on  hand  will  be  insufficient  to  liquidate  the  interests  of  the  other  partners  to  the  extent 
of  the  debit  balance  to  the  partner's  account.  Such  a  partner  must  therefore  pay  into  the  firm  the  amount 
of  his  indebtedness  and  then  the  accounts  of  the  remaining  partners  can  be  closed.  If,  however,  the 
delinquent  partner  is  insolvent,  the  amount  of  his  indebtedness  is  to  be  regarded  by  them  as  an  additional 
loss  to  be  borne  in  the  same  proportion  in  which  profits  are  shared ;  according'  to  Hatfield  this  practice 
seems  to  be  logical  and  to  have  the  sanction  of  the  court  although  some  authorities  state  that  in  such  a 
case,  the  delinquency  of  a  partner  would  be  borne  in  proportion  to  the  investment. 

Occasionally  in  the  liquidation  of  a  partnership  it  is  desired  to  distribute  the  net  assets  in  instalments 
as  quickly  as  they  are  converted  into  cash,  and  hence  before  the  shrinkage  in  liquidation  can  be  determined. 
In  such  cases,  it  is  essential  that  the  instalments  be  so  distributed  that  in  any  contingency  no  one  partner 
will  have  received  more  than  his  share. 

To  quote  again  from  Hatfield: 

"To  take  the  case  of  a  partnership  in  which  the  profits  and  losses  are  to  be  divided  as  follows :  50% 
to  A,  30%  to  B,  and  20%  to  C,  the  Balance  Sheet  before  liquidation  being  as  follows: 


BALANCE  SHEET  OF  A,  B  AND  C 

Assets " $25,000        A,  Capital  Account  $10,000 

Profit  and  Loss 5,000        B,  Capital  Account '  10,000 

C,  Capital  Account 10,000 


$30,000  $30,000 

"The  loss  is  apportioned  among  the  partners  in  the  proper  ratio,  leaving  the  claims  of  A,  B  and  C, 
$7,500,  $8,500  and  $9,000  respectively.  The  assets  are  gradually  converted  into  cash,  the  first  instalment 
available  for  distribution  being  $10,000.  How  shall  it  be  divided?  It  being  impossible  to  know  before- 
hand, how  much  the  remaining  assets  will  yield,  it  is  necessary  to  equalize  the  status  of  the  partners  so 
that  if  no  more  cash  is  received  the  actual  losses  will  be  in  the  predetermined  ratio.  If  nothing  had  been 
realized,  the  net  loss  of  each  of  the  partners  would  have  been  $7,500,  $8,500  and  $9,000.  But  if  A  loses 
$7,500,  B  should,  by  the  partnership  agreement,  lose  only  $-4,500  and  C  only  $3,000.  Before  paying  any- 
thing to  A,  $4,000  should  therefore  be  paid  to  B  and  $6,000  to  C.  The  proper  adjustment  having  been 
made,  all  further  instalments  are  to  be  divided  in  proportion  to  the  division  of  losses ;  this  method  of  treat- 
ing all  unrealized  assets  as  potential  losses  prevents  any  one  of  the  partners  being  overpaid." 

Insurance  of  a  Partner's  Life 

It  is  a  not  uncommon  practice  for  a  firm  to  insure  the  life  of  a  partner  of  partners  for  the  benefit 
of  the  firm.  The  death  of  a  partner,  particularly  if  he  contributes  an  unusual  type  of  skill  or  business 
ability,  would  be  keenly  felt  by  the  surviving  partner  or  partners. 

In  such  cases,  the  expense  of  taking  out  the  insurance  is  borne  by  the  firm  just  the  same  as  insurance 
placed  on  any  tangible  property  of  the  firm.  The  premiums  paid  on  such  insurance,  which  is  usually  either 
straight  life  or  term  life,  may  be  either  regarded  as  an  expense  or  they  may  be  capitalized,  the  insurance 
policy  being  shown  among  the  assets  of  the  firm.  While  the  former  is  the  more  conservative  practice 
there  is  no  objection  to  the  latter  method.  If  this  method  is  followed  the  question  arises  as  to  the  basis 
of  capitalization.  The  two  methods  followed  in  practice  are  (a)  to  capitalize  the  full  amount  of  annual 
premiums  paid  and  (b)  to  capitalize  the  premiums  at  the  cash  surrender  value  of  the  policy.  If  this  is 
done,  inasmuch  as  the  usual  policy  does  not  have  a  cash  surrender  value  until  after  it  has  been  in  force 
three  years,  it  would  be  necessary  to  charge  the  first  three  premiums  to  expense;  after  bringing  the  first 
year's  cash  surrender  value  on  the  books  as  an  asset,  such  a  part  of  each  succeeding  year's  premium  would 
be  charged  to  the  asset  account  as  would  show  the  increase  in  the  surrender  value  from  one  year  to  the 
next,  the  remainder  of  the  premiums  being  charged  to  expense. 

In  case  of  the  death  of  the  partner,  the  amount  received  from  the  insurance  company  in  payment  of 
the  death  claim  should  be  credited  to  the  asset  account  kept ;  the  net  proceeds  then  shown  by  the  account  is 
treated  as  a  profit  and  is  shared  by  the  surviving  partner,  or  partners  and  by  the  estate  of  the  deceased 
partner  as  profits  are  shared. 

REFERENCES 
Henry  Rand  Hatfield,  Ph.D.,  Modern  Accounting,  Chapter  XVII. 
L.  R.  Dicksee,  C.A.,  Advanced  Accounting,  Chapter  XIII. 
P.  J.  Esquerre,  C.P.A.,  Applied  Theory  of  Accounts,  Chapter  I. 
H.  C.  Bentley,  C.P.A.,  Notes  on  Partnership  Accounts. 
John  R.  Wildman,  C.P.A.,  Principles  of  Accounting,  Chapters  VI  and  XLI. 

Quiz  on  the  Theory  of  Partnership  Accounts 

1.  In  the  absence  of  any  partnership  agreement  as  to  the  showing  of  profits,  what  division  of  profits 
would  be  allowed  by  the  courts? 

2.  What  different  methods  are  there  of  handling  ledger  accounts  kept  with  partners? 

3.  Under  what  circumstances  should  a  Salary  account  be  kept  with  each  partner?  How  should  the 
undrawn  or  overdrawn  balance  of  the  account  be  shown  in  the  Balance  Sheet? 

4.  When  would  you  close  the  balance  of  the  Drawing  account  into  the  Capital  account  and  when  carry 
the  balance  of  the  account  forward  into  the  next  period? 

What  determines  at  any  time  the  interest  of  a  partner  in  the  firm  ? 

6.  What  distinction  would  you  make  between  the  division  of  profits  and  the  share  in  the  partnership 
assets  ? 


7.  State  the  general  principle  to  be  followed  in  problems  relating  to  the  admission  of  a  partner? 

8.  State  the  two-fold  purpose  of  reckoning  interest  on  partners'  capital  and  drawings.  What  entries 
are  made  for  the  interest  so  reckoned? 

9.  If  the  capital  accounts  of  two  partners  are  equal,  profits  being  shared  unequally,  which  partner  loses 
if  interest  is  not  allowed  on  the  capital  invested? 

10.  If  the  capital  accounts  are  unequal,  profits  being  shared  equally,  which  partner  would  lose? 

11.  Under  what  conditions  would  neither  partner  gain  nor  lose  if  interest  is  not  reckoned  on  capital? 

12.  In  case  of  liquidation,  what  is  the  status  of  a  loan  or  advance  made  to  a  firm  by  a  partner? 

13.  If  interest  on  a  partner's  loan  is  not  paid  in  cash,  to  what  account  should  it  be  credited? 

14.  What  principle  governs  the  division  of  the  net  assets  of  a  firm  in  case  of  dissolution? 

15.  How  should  any  shrinkage  of  partnership  asjets  in  liquidation  be  treated? 

16.  Suppose  in  case  of  dissolution  that  the  accDunt  of  a  partner  showed  a  debit  balance. 

17.  What  method  should  be  followed  in  a  dissolution  if  the  liquidation  of  the  firm  assets  extends  over 
a  considerable  period  and  it  is  desired  to  distribute  the  net  assets  in  instalments  as  quickly  as  they  are  con- 
verted into  cash? 

18.  Distinguish  between  one  who  buys  say  a  third  interest  in  a  firm  from  a  partner,  and  one  who 
invests  such  an  amount  as  will  entitle  him  to  a  third  interest. 

19.  A  firm  is  composed  of  A  and  B  whose  capital  accounts  show  credits  of  $30,000  and  $50,000  re- 
spectively; how  much  must  C  invest  to  give  him  a  one-fifth  interest? 

20.  If  the  firm  insured  the  life  of  a  partner  for  the  benefit  of  the  firm,  what  entry  would  be  made  for 
the  annual  premium?  At  what  valuation  would  you  show  the  policy  among  the  firm  assets?  In  the  event 
of  death,  what  distribution  of  the  insurance  should  be  made? 

21.  In  case  Goodwill  is  brought  on  the  books  of  a  partnership,  in  what  proportion  should  it  be 
divided  among  the  partners  ? 

ADVANCED  ACCOUNTING  PROBLEMS 

PART  I 

Partnership  Adjustments 

1.  (From  New  York  C.  P.  A.  Examination,  June,  1914.) 

X  and  Y  bought  merchandise  to  the  amount  of  $12,000.  X  contributed  $7,500;  Y,  $4,500.  They 
afterwards  sold  Z  a  one-third  interest  for  $6,000.  How  much  of  this  amount  should  X  and  Y  receive 
respectively  in  order  to  make  X,  Y,  and  Z  equal  partners  ? 

2.  During  the  summer  of  1909,  D  and  S  were  equal  partners  in  the  oriental  goods  business  in  Lake 
Placid,  N.  Y.  At  the  close  of  the  season  after  all  collections  had  been  made  and  all  debts  paid  there  re- 
mained in  the  bank  a  balance  of  $64.85.  Their  books  of  account  showed  that  during  the  summer  D  had 
withdrawn  $219.80  and  S  $132.  At  the  close  of  the  season  they  dissolved  partnership  but  no  immediate 
settlement  was  made  and  three  months  later  when  they  came  to  settle,  D  had  spent  the  remaining  balance 
of  $64.85.  At  that  time  D  entered  a  claim  for  personal  goods  to  the  amount  of  $26  which  he  had  con- 
tributed to  the  firm,  and  S,  a  similar  claim  for  $15.75.  S  demands  a  settlement.  What  amount  is  owing 
to  him  ? 

3.  Smith  and  Johnson  are  partners,  Smith  having  invested  $20,000  and  Johnson  $9,000,  profits  and 
losses  shared  equally.  Upon  liquidation  losses  are  suffered  so  that  the  amount  available  for  distribution 
to  the  partners  is  only  $10,000. 

How  should  the  $10,000  be  divided? 

4.  X,  Y  and  Z  are  partners,  their  capital  accounts  showing  A,  $60,000 ;  B,  $20,000,  and  C,  $45,000. 
Upon  dissolution  the  assets  of  the  concern  are  sold  for  $54,700. 

a.  How  should  the  deficit  be  divided? 

b.  B  is  insolvent  and  the  claim  against  him  is  worthless.  How  should  the  amount  available  for  dis- 
tribution be  divided? 

c.  Show  the  partners'  accounts  as  they  would  appear  after  the  books  had  been  closed  finally. 

6 


5.  (From  Examination  for  Admittance  to  the  American  Institute  of  Accountants,  June,  1917.) 

A,  B  and  C  were  in  partnership,  A's  capital  being  $90,000,  B's  $50,000,  and  C's  $50,000.  Their  agree- 
ment is  to  share  profits  in  the  following  ratio:  A,  60%;  B,  15%;  C,  25%.  During  the  year  C  withdrew 
$10,000.  Net  losses  on  the  business  during  the  year  were  $15,000,  and  it  is  decided  to  close  out  the  busi- 
ness. It  is  uncertain  how  much  the  assets  will  ultimately  yield,  although  none  of  them  is  known  to  be  bad. 
The  partners  therefore  mutually  agree  that  as  the  assets  are  liquidated,  distribution  of  cash  on  hand  shall 
be  made  monthly  in  such  a  manner  to  avoid  so  far  as  feasible,  the  possibility  of  paying  to  one  partner 
cash  which  he  might  later  have  to  repay  to  another.  Collections  are  made  as  follows:  May,  $15,000;  June, 
$13,000 ;  July,  $52,000.  After  this  no  more  can  be  collected.  Show  the  partners'  accounts,  indicating  how 
the  cash  is  distributed  in  each  instalment.  The  essential  feature  in  the  distribution  being  to  observe  the 
agreement  given  above. 

6.  (From  New  York  C.  P.  A.  Examination,  June,  1917.) 

Three  partners  contribute  capital  as  follows :  X,  $90,000 ;  Y,  $45,000,  Z,  $15,000.  They  share  profits  in 
the  proportion  of  X,  50%  ;  Y,  30%,  and  Z,  20%.  X's  salary  is  $5,000,  Y's  salary  is  $3,000,  Z's  salary 
is  $2,000.  At  the  end  of  their  fiscal  period  Z  dies.  The  books  are  closed  and  the  net  assets  ascertained 
to  be  $152,500.    X  and  Y  liquidate  the  firm's  affairs  and  distribute  the  surplus  assets  quarterly  as  follows: 

First  quarter $42,410.20 

Second  quarter 74,622.30 

Third  quarter 31,967.50    $149,000 


Prepare  a  statement  of  the  partners'  accounts,  shewing  how  the  distribution  of  assets  should  be  made, 
together  with  the  apportionment  of  the  loss. 

7.  (From  New  York  C.  P.  A.  Examination,  December,  1898.) 

A,  B,  and  C  agree  to  start  in  business  with  a  capital  of  $200,000,  of  which  A  is  to  furnish  $100,000 
and  B  and  C,  $50,000  each.  A  is  to  have  one-half  interest  in  the  business  and  B  and  C,  each  one-quarter. 
Interest  at  5%  is  to  be  credited  on  excess,  or  charged  on  deficiency  of  capital.  A  contributes  $100,000,  B, 
$45. 000,  and  C,  $40,000.  How  would  the  capital  accounts  stand  on  the  books  after  adjusting  the  interest 
at  the  end  of  the  year? 

8.  (From  New  York  C.  P.  A.  Examination,  June,  1901.) 

For  the  purpose  of  making  a  joint  speculation,  A  contributes  $3,000,  B,  $2,000,  and  C,  $1,000.  and 
they  agree  to  share  the  profits  or  loss  in  proportion  to  the  amounts  contributed.  October  15,  1900,  A 
deposited  the  $6,000  with  his  broker,  giving  instructions  to  buy  300  shares  New  York  Central  and  300 
shares  Chicago,  Burlington  &  Quincy.  The  order  was  executed  October  16,  1900,  N.  Y.  C.  at  130-H$,  and 
C.  B.  &  Q.  at  127.  April  10,  1901,  under  instructions  from  A,  N.  Y.  C.  was  sold  at  151^  and  C.  B.  & 
Q.  at  V.)W2,  a  check  being  received  from  the  broker  to  close  the  account.  How  much  does  A  owe  B  and 
C  for  their  interests  in  the  deal,  calculating  interest  at  6%  (365  days  to  the  year),  commission  at  Y%%, 
and  revenue  tax  of  $2  for  each  100  shares? 

9.  (From  C.  P.  A.  Examination,  New  York,  June,  1902.) 

A,  B  and  C  were  partners  carrying  on  business  with  a  capital  December  31,  1900,  of  $60,000,  of 
which  A's  share  was  $30,000;  B's,  $20,000;  and  C's,  $10,000;  each  partner  was  entitled  to  5%  interest  on 
his  capital;  profits  or  losses  to  be  shared  as  follows:  A,  7/12;  B,  %\  and  C,  1/6.  The  partners  agree, 
July  1,  l!»oif  to  dissolve.  After  all  partnership  assets  had  been  realized,  and  all  debts  paid  except  $500 
legal  expenses,  there  remained  a  balance  in  bank  of  $38,750.  Final  settlement  takes  place  December  31, 
1901.  Cash  in  bank  bears  interest  at  2%  from  October  1,  1901.  Show  a  statement  for  settlement  and 
partners'  capital  accounts  as  of  December  31,   1901 

10.  Wilson  and  Lawson  are  partners,  sharing  profits  and  losses  equally.  The  partnership  is  dis- 
solved December  SI,  1!»<>7,  at  which  time  Wilson's  capital  investment  was  $10,000,  and  Lawson's,  $2,500. 
The  total  liabilities  of  the  firm  are  $25,000,  which  includes  $5,000  due  Wilson  on  loan  account,  and  $2,500 
due  Lawson  on  loan  account.  The  assets  of  the  firm  are  disposed  of  for  $30,000  on  May  1,  1908.  Prepare 
accounts  closing  the  partnership  and  showing  the  position  in  which  the  partners  stand  to  each  other.  No 
allowance  for  interest  is  required. 

11.  (From  Massachusetts  C.  P.  A.  Examination,  October,  1914.) 

B  and  C  engage  in  business,  A  contributing  $10,000  and  B,  $5,000,  while  C  in  lieu  of  any  capital 
contribution  agrees  to  undertake  the  active  management  at  a  salary  of  $3,000  per  year,  to  be  paid  monthly. 

7 


After  allowing  5%  interest  on  capital,  they  are  to  divide  the  net  result  in  the  proportions  of  5,  3  and 
2  respectively. 

At  the  end  of  eighteen  months  they  ascertain  the  position  to  be  unfavorable  and  decide  to  wind  up.  The 
assets  realize  $12,500  ;  there  are  no  liabilities  except  for  capital  and  interest  thereon  and  one  month's  salary 
due  C. 

Make  up  the  partners'  accounts,  showing  the  amDunt  to  be  received  by  each. 

12.  (From  Massachusetts  C.  P.  A.  Examination,  June,  1912.) 

A  and  B  form  a  partnership,  A  investing  $30,000  and  B,  $50,000.  They  agree  to  share  expenses, 
profits  and  losses  equally.  They  further  agree  to  and  do  leave  their  original  investments  intact.  At  the  end 
of  the  first  year,  the  profits  from  the  operations  of  the  business  amount  to  $30,000,  against  which  A  has 
drawn  in  twelve  equal  monthly  instalments  on  the  last  day  of  each  month  an  aggregate  amount  of  $9,000. 
B  has  drawn  against  his  profits  on  the  last  day  of  each  quarter  the  sum  of  $2,500. 

Prepare  journal  entries  adjusting  interest  at  5%  per  annum  between  the  partners  in  respect  to  both 
their  investment  and  drawing  accounts,  and  render  statements  showing  the  amount  each  partner  has  in  the 
business  at  the  end  of  the  year. 

13.  (From  Illinois  C.  P.  A.  Examination,  May,  1914.) 

A  and  B  enter  into  a  partnership  and  will  share  profits  in  the  proportions  indicated  by  their  invest- 
ments. A  furnishes  $25,000  and  B,  $15,000,  which  is  invested  in  lands  and  buildings,  $10,000  and  mer- 
chandise, $30,000.  However,  before  they  have  actually  commenced  business,  C  realizing  that  A  and  B  have 
a  promising  venture,  offers  to  buy  a  one-third  interest  in  the  business  for  $20,000.  A  agrees  to  sell  provided 
B  will  consent  to  pay  him  a  bonus  of  $4,000  out  of  his  (B's)  share.  This  B  agrees  to  do  and  consent  to 
the  sale. 

How  should  the  $20,000  be  divided  between  A  and  B  so  that  the  interest  of  all  three  partners  will  be 
equal? 

14.  (From  Virginia  C.  P.  A.  Examination,  November,  1910.) 

Smith,  Hill  and  Davis  engage  in  business  under  an  agreement  that  Smith  is  to  have  a  salary  of  $200 ; 
Hill,  $150;  and  Davis  $100  per  month,  respectively;  that  the  earnings  are  to  be  determined  at  any  time  at 
the  request  of  any  partner  and  the  profits  divided  on  a  basis  of  the  amount  of  business  secured  by  each. 
They  are  in  business  nine  months  and  find  their  accounts  as  follows : 

Smith's  business $4,500.00 

Hill's  business , 2,800.00 

Davis'  business 3,000.00 

Net  profits .  2,100.00 

They  then  decide  to  rescind  the  salary  agreement  and  divide  the  profits  shown  on  a  basis  of  business 
secured  individually,  treating  the  salary  drawn  as  an  advance. 
You  find  errors  during  the  nine  months'  period,  namely : 

Office  furniture,  charged  to  operation $65.00 

Accounts  receivable,  Smith's  business,  uncollectable 210.00 

Funds  advanced  by  Davis,  credited  to  his  earning  account 400.00 

Items  not  yet  paid  nor  entered  into  accounts : 

Smith's  salary   . .'. $200.00 

Hill's  salary  . . . . '. 150.00 

Advertising 27.50 

Clerk  Hire  130.00 

Telephone 6.00 

Rent 50.00 

Stationery  expenses 15.00 

Show  the  journal  entries  necessary  to  readjust  the  accounts;  make  a  statement  of  the  profit  and  loss 
account,  showing  all  corrections  and  showing  each  man's  share  in  the  net  profits. 

15.  (From  New  York  C.  P.  A.  Examination,  June,  1909.) 

A,  B,  and  C  and  D,  partners  sharing  profits  equally,  decide  to  dissolve  partnership  and  on  December 
31,  1908,  appoint  a  liquidator  and  transfer  all  assets  to  him.    He  is  to  receive  for  his  services  5%  of  the  cash 

S 


collected  by  him  in  the  liquidation  of  the  assets.     The  liquidator  is  also  to  be  allowed  the  expenses  paid  by 
him  in  the  liquidation  of  the  business  as  follows: 

Clerk  hire $1,000.00 

Rent 500.00 

Miscellaneous  expenses  700.00 

All  the  debts  of  the  firm  were  paid  and  all  the  notes  and  the  accounts  were  collected  excepting  $3,200 
of  worthless  and  uncollectable  accounts.  The  furniture  and  fixtures  brought  $2,800  and  the  merchandise 
was  sold  for  $18,000  cash.  The  balance  payable  to  partners  was  distributed  on  December  31,  1908.  No 
interest  is  to  be  figured  on  the  partners'  accounts  or  on  the  moneys  in  possession  of  the  liquidator. 

Prepare  cash  account  of  liquidator,  statement  showing  expenses  and  losses  in  liquidation  and  statement 
of  the  partners'  accounts.    The  balance  sheet  of  the  firm  on  December  31,  1908,  was  as  follows: 

Debits     Credits 

Furniture  and  fixtures $3,500 

Merchandise  inventory 20,500 

Notes  receivable   14,000 

Accounts  receivable   38,000 

Unearned  insurance  premium  expiring  during  1908. 800 

Cash   7,500 

Notes  payable .*.  $5,000 

Accounts  payable 38,740 

Accrued  interest  on  notes  payable ,    80 

Accrued  taxes  480 

A's  account 16,000 

B's  account 8,000 

C's  account 10,000 

D's  account 6,000 

Totals $84,300    $84,300 

16.     (From  New  York  C.  P.  A.  Examination,  June,  1906.) 

Blackman  &  Co.  of  New  York  agree  with  Whittaker  &  Co.  to  ship  on  joint  account  a  carload  of  goods 
on  consignment  to  Seattle.  The  invoice  price  of  the  goods  is  $4,000  less  5%.  Blackman  &  Co.  pay  the  haul- 
ing, insurance  and  freight  charges  amounting  to  $200  and  give  to  Whittaker  &  Co.,  March  1,  1905,  a  sight* 
draft  on  the  consignees  for  $2,000  as  part  payment  for  the  goods.  On  May  1,  1905,  Blackman  &  Co.  receive 
an  account  sales  from  the  consignees  and  their  check  for  $6,000  as  the  net  proceeds  of  the  consignment. 
They  then  pay  Whittaker  &  Co.  the  balance  due  them.     Interest  is  calculated  at  6%. 

Prepare  joint  consignment  account  and  the  account  to  be  rendered  by  Blackman  &  Co.  to  Whittaker 
&  Co. 

11.     (From  Washington  C.  P.  A.  Examination  June,  1906.) 

X  and  Y  enter  into  partnership,  X's  capital  being  $20,000  and  Y's  $15,000.  Capital  is  to  bear  interest 
at  10%  per  annum ;  profits  are  to  be  divided  equally  between  the  partners.  The  profits  for  the  first  two  years, 
after  charging  interest  on  capital,  were: 

1st  year  $6,000 

2nd  year 7,500 

and  the  drawings  of  the  partners  in  excess  of  salaries  were: 

X     $1,500  first  year — $1,750  second  year 
Y       1,200  first  year —  1,500  second  year 

At  the  end  of  the  second  year,  Z  is  admitted  into  partnership,  who  puts  into  the  business  the  same 
amount  of  capital  as  Y  had  in  at  that  time  and  on  the  same  conditions  as  to  interest  and  division  of  profits. 
The  profits  of  the  business  for  the  third  year  were  $12,000  and  the  partners'  drawings  in  excess  of  salaries 
were : 

X— $1,750  Y— $1,600  Z— $1,500 

Construct  the  capital  accounts  of  the  partners  for  each  of  the  three  years,  showing  the  balance  of  each 
at  the  end  of  the  third  year. 

9 


18.  TRIAL  BALANCE  OF  A,  B  &  C,  JUNE  30,  1913. 

Debits        Credits 

Cash $8,000.00 

Profit  and  Loss 6,000.00 

Accounts  Payable  $2,000.00 

A's  Loan  Account 3,000.00 

A's  Capital  Account 3,000.00 

B's  Capital  Account t ...  5,000.00 

C's  Capital  Account  1,000.00 


$14,000.00  $14,000.00 

a.  Assuming  that  there  is  no  partnership  agreement,  and  that  C  is  unable  to  make  good  his  deficiency, 
show  how  you  would  dispose  of  the  above  cash  balance.  Set  up  ledger  accounts  for  the  above  items  and  show 
the  cash  book  and  journal  entries  required  for  winding  up  the  affairs  of  the  partnership  in  conformity  with 
the  common  law. 

b.  Assuming  that  later  on  C  came  into  possession  of  property  and  offered  to  pay  A  and  B  the  amount 
of  deficiency  standing  to  the  debit  of  his  account  at  the  time  the  partnership  was  dissolved,  and  that  they 
accepted  such  amount  in  full  settlement  of  their  claim  against  him,  how  should  the  amount  paid  by  him  be 
divided  between  A  and  B  ? 

c.  Had  their  ledger  accounts  shown  the  following  balances  how  would  you  have  distributed  the  loss  and 
residue  ? 

Debits  Credits 

Cash $6,000.00  •     ' 

Profit  and  Loss 9,000.00 

A's  Loan ... $5,000.00 

A's  Capital  Account 2,000.00 

B's  Capital  Account 7,000.00 

C's  Capital  Account .     1,000.00 


$15,000.00     $15,000.00 

19.     (From  Wisconsin  C.  P.  A.  Examination,  April,  1914.) 

January  1,  1913,  A  and  B  signed  articles  of  copartnership  to  engage  in  a  mercantile  business,  agreeing 
to  invest  $15,000  and  $25,000  respectively.  Profits  were  to  be  divided  in  proportion  to  capital  contributed, 
•and  interest  at  5%  was  to  be  allowed  on  investments  in  excess  of  the  agreed  contributions  and  was  to  be 
charged  on  deficits  under  the  agreed  contributions. 

The  trial  balance  of  their  books  on  December  31,  1913,  was  as  follows : 

Purchases $60,000.00 

Office  Expense 1,000.00 

Real  Estate 5,000.00 

Building    10,000.00 

Accounts  Receivable 12,000.00 

Cash  on  Hand 1,000.00 

Notes  Receivable 8,000.00 

Furniture  and  Furnishings 2,000.00 

Discounts  Earned  $1,000.00 

Accounts  Payable  7,000.00 

Salaries  and  Wages • 4,000.00 

Notes  Payable  4,000.00 

Sales , 55,000.00 

A 9,000.00 

B 27,000.00 

iThe  merchandise  on  hand  is  valued  at  $10,000. 

After  allowing  for  interest  on  investments,  divide  the  net  profits  according  to  the  agreement.  Give  the 
capital  accounts  of  each  partner  and  the  balance  sheet  as  of  January  1,  1914. 

On  this  date  a  third  party,  C,  desired  to  enter  the  partnership,  and  it  was  agreed : 

a.     That  C  pay  $9,000  in  cash  for  a  one- fourth  ( % )  interest  in  the  new  concern. 

10 


b.  That  good  will  of  A  and  B  be  valued  at  $3,000. 

c.  That  A  and  B  adjust  their  capitals,  so  that  they  hold  a  one- fourth  (*4)  and  one-half  (l/2)  interest 

respectively  in  the  new  firm. 

d.  That  profits  and  losses  are  to  be  divided  according  to  capital  contributions. 

In  the  adjustment,  A  received  cash  (out  of  the  $9,000  paid  in  by  C)  for  his  excess  investment,  while 
B  received  the  remainder  of  the  $9,000  paid  in  by  C,  and  the  balance  due  him  was  considered  a  loan  to  the 
partnership. 

Give  journal  entries  necessary  to  record  the  above  facts  and  the  opening  balance  sheet  of  the  new 
firm. 

April  1,  1914,  A,  B,  and  C  agreed  to  sell  the  business.  Up  to  this  time  each  partner  had  withdrawn 
$500.  The  assets  were  disposed  of  for  $24,500  cash,  and  the  vendee  assumed  the  liabilities  of  the  part- 
nership. 

How  should  this  sum  of  $24,500  be  divided  among  the  partners?  Show  the  exact  relation  of  the  part- 
ners to  one  another  by  accounts  or  statements. 

20.  (From  New  York  C.  P.  A.  Examination,  January,  1915.) 

iThe  firm  of  A  &  B  began  business  on  January  1,  1912,  the  terms  of  the  partnership  contracts  specifying 
that  no  interest  was  to  be  credited  on  investments  or  charged  on  withdrawals,  and  all  profits  or  losses  were 
to  be  shared  equally.    A  invested  $24,000  and  B  $15,000. 

On  November  30,  1914,  the  partnership  was  dissolved,  and  as  the  books  had  not  been  properly  kept, 
the  following  statement  was  submitted  to  the  partners  as  a  basis  for  settlement,  and  agreed  to  by  them: 
cash,  $14,200 ;  net  debit  of  A,  $6,300 ;  expenses,  $15,300 ;  net  credit  of  B,  $10,500 ;  profit  and  loss,  debit, 
$9,000 ;  credit,  $1,500 ;  real  estate  having  an  estimated  market  value  of  $3,300 ;  the  bank  holds  firm's  six 
months'  6%  note  for  $10,000,  due  January  31,  1915,  on  which  interest  is  unpaid. 

B  liquidated  the  assets  and  liabilities  and  in  due  course  sold  the  real  estate  for  $4,000  and  paid  off  the 
note  when  due. 

•     Prepare  the  partners'  accounts  as  of  November  30,  1914  and  as  of  the  close  of  liquidation,  and  a  balance 
sheet  as  of  November  30,  1914. 

21.  (From  California  C.  P.  A.  Examination.)  • 

Brown,  Green,  Black  and  White  form  a  partnership  on  June  1,  1903.  Capital  is  contributed  by  Brown, 
$20,000;  Green,  $18,000;  Black,  $12,500;  and  White,  $9,500.  The  profits  and  losses  are  to  be  divided  in 
the  ratio  of  these  contributions.    On  May  31,  1904,  the  Trial  Balance  shows  as  follows: 

Brown,  Capital , $20,000.00 

Green,  Capital ,' 18,000.00 

Black,  Capital 12,500.00 

White,  Capital 9,500.00 

Cash $3,480.28 

Merchandise 52,190.05 

Fixtures 2,940.00 

Accounts  Receivable 24,082.75 

Patent  Rights    2,000.00 

Real  Estate 9,000.00 

Accounts  Payable 16,308.64 

Demand  Notes  Payable 25,000.00 

Mortgage  Note  (on  the  Real  Estate) 4,000.00 

Wages  and  Salaries 4,560.00 

Discount  on  Sales 1,240.00 

Discount  on  Purchases 1,392.80 

General  Expenses 3,800.44 

Commission    2,755.40 

Interest   792.00 

Brown,  Personal  Drawings 1,980.00 

Green,  Personal  Drawings 1,242.00 

Black,  Personal  Drawings 2,148.50 

$109,456.84  $109,456.84 
11 


Merchandise  account  represents  Purchases  of  $142,784.30;  Sales,  $89,542.28;  Rebates  on  Purchases, 
$2,472.10,  and  Allowances  to  Customers,  $1,420.13.  Inventory  Value  May  31,  1904,  is  $73,669.37.  Office 
rent,  $100,  has  been  paid  in  advance  for  June,  1904.  Unexpired  insurance  premiums  amount  to  $74.00.  Ac- 
crued interest  on  Demand  Notes  to  May  31,  1904,  is  $375,.00.  It  is  agreed  that  depreciation  of  25  per  cent, 
on  Fixtures  shall  be  charged,  that  valuation  of  Patent  Right  shall  be  increased  to  $3,000.00,  that  a  Reserve 
Fund  of  2}4  per  cent,  of  the  Accounts  Receivable  shall  be  created  to  provide  for  loss  in  collection,  that 
interest  shall  be  allowed  to  all  partners  on  Capital  Accounts  at  3  per  cent,  per  annum-,  and  that  a  salary  shall 
be  allowed  to  White  of  $1,200.00. 

Prepare  a  Profit  and  Loss  Account,  and  Balance  Sheet  as  of  May  31,  1904.  Present  the  Operating 
Statements  in  all  detail  possible  with  the  information  at  hand,  and  show  the  percentage  of  Gain  or  Loss  per 
Trading  Account,  and  of  Gain  or  Loss  per  Profit  and  Loss  Account  on  the  basis  of  the  cost  of  the  Merchandise 
sold. 

22.     (From  Illinois  C.   P.  A.  Examination,  May,  1913.) 

A  and  B,  equal  partners  in  a  manufacturing  business,  admit  their  factory  superintendent,  C,  as  an  equal 
partner  with  them  in  the  profits  without  his  furnishing  any  capital,  A  and  B  reserving  to  themselves  in 
case  of  dissolution  any  good  will  which  may  have  accrued  to  the  business. 

On  December  31,  1912,  a  balance  sheet  was  drafted  and  approved  by  all  concerned  as  follows: 

Assets : 

Real  Estate  and  Plant , . $90,000.00 

Merchandise  Inventory   35,000.00 

Accounts  Receivable 25,000.00 

Notes  Receivable 15,000.00 

Cash 18,000.00 

i    •  

$183,000.00 

Liabilities: 

Notes  Payable $10,000.00 

Accounts  Payable 12,500.00 

A's  Account ?. . .. $4,500.00 

B's  Account , 4,000.00 

C's  Account 2,000.00  10,500.00 

Capital  Accounts: 

A $75,000.00 

B 75,000.00     150.000.00 


$183,000.00 


Later  the  business  was  sold  as  a  "going"  concern  and  the  partnership  dissolved.  The  purchaser  as- 
sumes all  outside  liabilities  and  pays  the  sum  of  $225,000  cash,  of  which  the  real  estate  and  plant  is  valued  at 
$120,000.  Make  the  entries  necessary  to  close  the  books  of  the  partnership,  and  show  the  condition  of  the 
partners'  accounts  after  closing. 

23.  (From  examination  for  Admittance  to  the  American  Institute  of  Accountants,  June,  1917.) 
A,  B  and  C  formed  a  partnership.  A  agreed  to  furnish  $10,000,  B  and  C  each  $7,000.  A  was  to 
manage  the  business  and  receive  one-half  of  the  profits ;  B  and  C  were  each  to  receive  one-fourth.  A  sup- 
plied merchandise  worth  $8,500,  but  no  additional  cash.  B  turned  over  to  A,  as  managing  partner,  $9,000 
cash,  and  C  turned  over  $5,500. '  The  business  was  conducted  by  A  for  some  time,  but  without  keeping  exact 
books.  While  managing  the  business  A  purchased  additional  merchandise  amounting  altogether  to  $75,000 
and  made  sales  of  $100,000.  The  cash  received  and  paid  out  for  the  partnership  was  not  kept  separate  from 
A's  personal  cash.  In  order  to  straighten  out  mjatters,  B  took  over  the  management.  He  found  receivables 
amounting  to  $20,000,  and  of  these  he  collected  $4,500.  The  merchandise  still  on  hand  he  sold  for  $500. 
These  receipts  he  deposited  in  a  bank  to  the  credit  of  the  firm.  The  remaining  accounts  proved  worthless. 
The  outstanding  accounts  payable  amounted  to  $2,000,  of  which  $1,500  had  been  incurred  in  purchasing 
merchandise  and  $500  for  expenses.  These  accounts  he  paid.  A  presented  vouchers  showing  that  during 
his  management  he  had  paid  other  expenses  of  $2,400.  By  mutual  agreement  B  was  held  to  be  entitled 
to  $100  on  account  of  interest  on  excess  capital  contributed  and  A  and  C  were  to  be  charged  $75.00  each  for 
shortage  in  contribution  of  capital. 

12 


a.  Prepare  trading  and  profit  and  loss  accounts  and  accounts  of  each  of  the  partners,  indicating  the 
final  adjustment  to  be  made  in  closing  up  the  partnership. 

b.  Show  how  the  above  final  adjustment  would  be  modified  if  A  proved  to  have  no  assets  or  liabilities 
outside  the  partnership. 

24.     (From  Massachusetts  C.  P.  A.  Examination,  October,  1916.) 

Fish  and  Driscoll  were  partners  in  a  manufacturing  business  sharing  profits  equally.  Driscoll  was  the 
financial  man  having  charge  of  the  books  and  accounts.  Fish  was  the  practical  man.  On  January  1,  1909, 
Driscoll  retired  from  the  concern.  The  capital  accounts  of  the  two  partners  on  that  date  showed  Fish 
$15,000  and  Driscoll  $16,000.  Fish  agreed  to  pay  Driscoll  for  his  interest  in  the  business  the  sum  of  $20,000. 
Of  this  amount  $5,000  was  paid  in  Cash  (from  the  funds  of  the  firm)  and  for  the  remainder  Driscoll  ac- 
cepted Fish's  note,  which  was  secured  by  a  mortgage  on  his  house.  Because  of  Fish's  lack  of  knowledge 
regarding  accounts,  the  cash  payment  only  appeared  on  his  books. 

Fish  conducted  the  business  himself  for  the  next  five  years.  The  profit  and  loss  account  on  his  books 
showed  profits  for  those  five  years  to  have  been  $5,000,  $5,300,  $6,750,  $8,500  and  $10,600.  Fish  had 
withdrawn  from  the  business  over  and  above  his  salary  $16,250. 

Fish  then  desired  to  enlarge  his  plant  and  arranged  for  Smith  to  buy  a  half  interest.  They  agreed  that 
the  good  will  was  worth  three  times  the  average  profits  for  the  last  five  years  as  shown  by  the  books.  Smith 
was  to  obtain  his  harf  interest  in  the  business  and  good  will  by  investing  cash  equal  to  the  capital  account 
of  Fish  on  January  1,  1914.  Also  cash  equal  to  half  the  good  will.  It  was  agreed  to  place  the  full  value  of 
good  will  upon  the  books.  Fish  had  purchased  machinery  for  plant  during  the  five  years  as  follows :  $3,000  ; 
$3,500  ;  $4,000  ;  $4,500  ;  and  $5,000  respectively. 

Fish's  bookkeeper  on  January  1,  1914,  made  up  the  following  statement: 

Cash    $150.00        Accounts  and  Notes  Payable $30,000.00 

Machinery    45,000.00 

Accounts  Rec 14,000.00 

Inventories  of  Raw  and  Finished  Product  16,750.00 

At  the  end  of  the  year  1914  the  partners  had  their  accounts  examined  by  an  accountant,  who  found 
that  no  depreciation  had  been  allowed  by  Fish  during  the  five  years  that  he  was  conducting  the  business 
alone,  that  no  entry  had  been  made  for  the  note  given  to  Driscoll  and  that  the  balance  of  DriscoH's  account 
after  the  cash  payment  had  been  charged  to  it  had  been  transferred  to  his  (Fish's)  account.  Both  partners 
(Fish  and  Smith)  were  fairminded  and  neither  desired  to  obtain  an  advantage  over  the  other.  They 
agreed  that  depreciation  from  January  1,  1909,  to  January  1,  1914,  at  the  rate  of  10  per  cent,  a  year  on  the 
reducing  basis  be  allowed  in  determining  the  annual  profit,  but  in  view  of  rising  machinery  prices  the  ma- 
chinery should  be  carried  on  the  books  of  the  new  company  at  cost  to  Fish :  and  that  Driscoll's  note  be 
entered,  and  that  the  partner  having  the  lesser  capital  after  this  adjustment  had  been  made  should  contribute 
cash  to  bring  his  capital  up  to  the  amount  of  the  other  partner  and  allow  the  other  partner  interest  at  6 
per  cent,  on  this  amount  for  the  year  1914. 


the  entries  necessary  to  give  effect  to  the  wishes  of  the  partners; 

the  amount  necessary  to  be  contributed  and  make  a  balance  sheet  after  the  necessary 


a.  Show 

b.  State  the  amount  necessary  to  be  contributed  and  make  a  balance  sheet  after  the  necessary  entries 
had  been  made. 


13 


25.     (From  Ohio  C.  P.  A.  Examination,  November,  1916.) 

A  and  B  have  been  partners  for  ten  years  with  respective  interests  of  two-thirds  and  one-third  in  all 
particulars.  A  desiring  to  retire  from  the  partnership,  B  and  C  agree  to  purchase  A's  interest.  As  a  basis 
of  settlement  the  following  Trial  Balance  is  submitted: 

TRIAL  BALANCE  OF  A  AND  B  AT  DECEMBER  31,  1915. 

Cash $27,720.83 

Accounts  Receivable 104,123.17 

Raw  Material  Jan.  1 92,600.00 

Finished  Goods  Jan.  1 67,500.00 

Raw  Material  Purchased 156,500.00 

Supplies  Jan.  1 5,000.00 

Supplies  Purchased 7,000.00 

Labor i 163,000.00 

Superintendence,  etc 6-,000.00 

Power,  Heat  and  Light 13,000.00 

Taxes,  Insurance,  etc 12,500.00 

Land 25,000.00 

Buildings 75,000.00 

Machinery ; 50,000.00 

Selling  Expense 75,000.00 

General  Expenses 30,000.00 

Accounts  Payable $127,944.00 

Sales  (Net)    500,000.00 

A's  Capital 200,000.00 

B's  Capital 100,000.00 

A's  Drawing  Account 12,000.00 

B's  Drawing  Account 6,000.00 


$927,944.00  $927,944.00 

In  determining  A's  interest  the  following  data  is  to  be  taken  into  consideration : 

a.  During  the  term  of  the  partnership  of  A  and  B,  no  allowance  was  made  for  depreciation  of  Build- 
ings or  Machinery ;  nor  was  any  reserve  set  up  for  bad  debts,  the  custom  having  been  to  charge  off  accounts 
only  when  known  to  be  worthless.  It  is  agreed  to  depreciate  the  Buildings  for  10  years  at  2  per  cent,  on 
decreasing  values ;  and  to  depreciate  $30,000  of  Machinery  for  10  years  and  $20,000  for  3  years  at  10  per 
cent,  on  decreasing  values. 

b.  It  is  further  agreed  between  all  parties  that  the  assets  and  liabilities  shall  consist  of 
Assets : 

Cash  as  shown  on  Trial  Balance 

Land  at  book  value 

Buildings  and  Machinery  at  book  values,  less  depreciation 

Accounts  Receivable  as  shown  on  Trial  Balance,  except  that  $2,000  is  to  be  deducted  for  doubt- 
ful accounts 

Raw  Materials,      as  per  inventory $100,000.00 

Finished  Goods,     "     "  "        75,000.00 

Supplies  "     "  "        6,500.00 

Prep'd  Insurance,  "     "  "        3,000.00 

Liabilities : 

Accounts  Payable  as  shown  on  Trial  Balance 

Accrued  Taxes 2,500.00 

Accrued  Wages 7,500.00 

c.  The  good  will  is  to  be  taken  as  equal  to  the  net  earnings  for  the  last  three  years,  after  taking  into 
consideration  the  depreciation  on  Buildings  and  Machinery  pertaining  to  these  years,  and  the  allowance  of 
$2,000  during  1915  for  doubtful  accounts.  The  profits  shown  bv  the  books  were  $30,450.19  for  the  year 
1913,  and  $38,287.31  for  the  year  1914. 

14 


From  the  given  data  prepare  the  following: 

1.  A  statement  of  the  profits  and  loss  for  the  year  1915  regardless  of  depreciation;  then  add  the  good 
will,  deduct  the  depreciation  of  Buildings  and  Machinery  for  the  whole  time  and  show  the  remainder  that  is 
to  be  carried  to  the  Balance  Sheet. 

2.  A  Balance  Sheet  after  making  all  adjustments  and  taking  into  consideration  good  will  and  depre- 
ciations.   Show  on  this  statement  the  Net  Worth  as  a  whole  and  A  and  B's  respective  interests. 

3.  Statement  showing  how  you  arrive  at  the  valuation  of  the  good  will. 

•i.  On  the  assumption  that  B  and  C  are  to  be  equal  partners  in  all  respects,  state  the  amount  of  cash 
that  each  would  have  to  contribute  towards  the  purchase  of  A's  interest,  after  turning  over  all  of  the 
old  partnership  to  A  in  part  payment. 


15 


PART  II 
CORPORATION  ACCOUNTS 

Closing  Entries  for  Partnership  Books  and  Opening  Entries  for  Corporation  Books 

To  illustrate  the  form  of  entries  to  be  made  in  closing  a  set  of  partnership  books  and  in  opening  a  set 
Of  corporation  books  the  following  proposition  is  submitted : 

Hall,  Ball  &  Co.,  a  partnership  conducting  a  wholesale  business  and  showing  profits  in  proportion  to 
investments,  concludes  to  incorporate.  The  following  balance  sheet  was  prepared  as  of  December  31,  1915, 
the  day  on  which  the  corporation  is  to  succeed  to  the  business 

BALANCE  SHEET,  DECEMBER  1,  1915 

Cash $5,000        Accounts  Payable $25,000 

Accounts  Receivable 30,000        Notes  Payable 5,000 

Inventory 120,000         Hall— Capital 60^000 

Sundry  Assets 25,000         Ball — Capital 60,000 

Clark — Capital 30,000 


$180,000  .      $180,000 

They  incorporate  the  Hall-Ball  Company  with  an  authorized  capital  of  $175,000,  all  the  stock  to  be 
issued  to  the  three  partners  in  exchange  for  their  respective  interests  in  the  business. 

Closing  entries  for  the  partnership  books  and  open/ng  entries  for  the  corporation  are  required: 

Entries  to  Close  Partnership  Books 

(a) 

Good  will $25,000 

Hall— Capital $10,000 

Ball— Capital    10,000 

Clark— Capital 5,000 

To  bring  good  will  on  the  partnership  books,  its  value  being  determined  by 
the  excess  of  the  capital  stock  to  be  issued  to  the  partners  over  the  net  worth  of 
their  business  as  shown  by  the  balance  sheet  prepared  Dec.  1.    Good  will  is  di-    . 
vided  among  them  in  the  proportion  in  which  they  share  profits. 

(b) 

The  Hall-Ball  Company $205,000 

Cash )$5,000 

Accounts  Receivable , 30,000 

Inventory    120,000 

Sundry  Assets 25,000 

Good  will   25,000 

To  close  the  accounts  with  the  assets  taken  over  by  The  Hall-Ball  Company. 

(c) 

Accounts  Payable  $25,000 

Notes  Payable  5,000 

The  Hail-Ball  Company $30,000 

To  close  the  accounts  with  the  liabilities  assumed  by  The  Hall-Ball  Co. 

(d) 

Capital  Stock  (Hall-Ball  Co.) $175,000 

The  Hall-Ball  Company $175,000 

To  bring  on  the  books  the  1,750  shares  of  stock  received  from  The  Hall- 
Ball  Co.  in  exchange  for  the  partnership  business. 

16 


(e) 

Hall-Capital   ' $70,000 

Ball— Capital 70,000 

Clark— Sapital 35,000 

Capital  Stock '  $175,000 

To  show  the  issue  to  the  individual  partners  of  the  capital  stock  of  The 
Hall-Ball  Co.,  thus  closing  all  accounts  on  the  partnership  books. 

Entries  to  Open  Corporation  Books 

December  1,  1915 

The  Hall-Ball  Company 

Has  Been  Incorporated  This  Day 

Under  the  Laws  of  the 

Commonwealth  of  Massachusetts 

With  an  Authorized  Capital  Stock  of 

One  Hundred  Seventy-five  Thousand 

Divided  Into 

Seventeen  Hundred  Fifty  Shares  • 

of  a 

Par  Value  of  One  Hundred  Dollars 

Cash $5,000 

Accounts  Receivable 30,000 

Inventory    120,000 

Sundry  Assets 25,000 

Good  will 25,000 

Hall,  Ball  &  Co $205,000 

To  bring  on  the  books  the  assets  acquired  from  Hall,  Ball  &  Co. 

Hall,  Ball  &  Co $30,000 

Accounts  Payable $25,000 

Notes  Payable •. 5,000 

To  bring  on  the  books  the  liabilities  of  Hall,  Ball  &  Co.  assumed  by  the  new 
corporation. 

Hall,  Ball  &  Co $175,000 

Capital  Stock $175,000 

To  show  the  issue  to  Hall,  Ball  &  Co.  of  1,750  shares  of  stock  in  exchange 
for  the  business  formerly  conducted  by  them  as  a  partnership. 

COMMENTS 

In  the  organization  of  a  corporation  to  take  over  a  business  formerly  conducted  as  a  partnership  or 
by  a  sole  proprietor,  the  cash  of  the  old  business  as  a  rule  is  not  taken  over  by  the  new  company. 

The  above  entries  are  made  on  the  assumption  that  the  partnership  books  are  to  be  discarded  and  a 
new  set  of  books  opened  for  the  corporation.  When  the  partners  in  a  business  become  the  principal  or 
only  stockholders  in  a  new  corporation  formed  to  take  over  the  business,  as  in  the  above  case,  it  is  not  neces- 

to  open  a  new  set  of  books.  An  entry  could  be  made  bringing  on  the  books  only  the  new  accounts  and 
closing  out  the  capital  accounts  of  the  partners. 

17 


In  the  above  problem  if  the  accounts  were  to  be  continued  in  the  same  books,  the  only  entries  necessary 
would  be  as  follows : 

Goodwill $25,000 

Hall— Capital $10,000 

Ball— Capital   10,000 

Clark— Capital 5,000 

(Explanation) 

Hall— Capital 70,000 

Ball— Capital   70,000 

Clark— Capital 35,000 

Capital  Stock 175,000 

(Explanation) 

Assume  that  the  capital  accounts  of  each  partner  showed  the  following  balances  after  the  distribution 
of  the  Goodwill: 

Hall,  $61,475  Ball,  $58,730  Clark,  $29,795 

What  change  would  be  made  in  closing  entry  (e)  ? 

26.     (From  Boston  High  School  Examination  for  Commercial  Teachers,  1911.) 

Shaw  &  Co.,  a  partnership  conducting  a  manufacturing  business,  conclude  to  incorporate.    The  firm  has 
the  following  assets  and  liabilities : 

Cash $5,000        Accounts  Payable  $20,000 

Accounts  Receivable 30,000         Shaw,  capital 45,000 

Plant  and  Sundry  Assets 165,000         Maco,  capital 45,000 

Laird,  capital 45,000 

Paige,  capital 45,000 


$200,000  $200,000 

They  incorporate  the  Shaw  Manufacturing  Co.  with  an  authorized  capital  of  $200,000,  divided  into  1,000 
shares  of  7  per  cent,  preferred  stock  and  1,000  shares  of  common  stock,  both  classes  of  stock  at  $100  par 
value.  Each  partner  is  to  receive  $25,000  of  the  preferred  stock  and  $20,000  of  the  common  stock  for  his 
share  in  the  business.    The  remainder  of  the  stock  is  to  be  held  for  sale. 

Make  journal  entries  for  the  following: 

The  partnership  books  are  to  be  closed. 

The  corporation  books  are  to  be  opened. 

Each  of  the  four  shareholders  donates  to  the  corporation  $5,000  of  common  stock  to  be  sold  at  such 
price  as  will  produce  immediate  cash  capital. 

Sold  the  donated  stock  at  95,  for  half  cash  and  half  note. 

Sold  for  cash  50  shares  common  stock  at  105. 

The  net  profits  for  the  year  were  $17,000. 

A  dividend  was  declared  on  the  preferred  stock  and  a  dividend  of  6  per  cent,  was  declared  on  the  shares 
of  common  stock  outstanding. 

At  the  end  of  the  second  year  all  stock  had  been  sold.  The  net  profits  were  $11,000.  To  declare 
the  preferred  dividend,  and  a  dividend  of  6  per  cent,  on  the  common  stock,  it  became  necessary  to  apply 
profits  earned  during  the  preceding  year. 

A  bond  issue  of  $50,000  was  authorized.  At  the  end  of  three  months  10,000  of  the  bonds  were  sold 
at  101  and  accrued  interest  amounting  to  $125. 

Three  months  later  $10,000  of  bonds  were  sold  at  98  and  accrued  interest,  $250.  At  the  end  of  the 
year  bond  interest  was  paid,  $1,000. 

$2,498.75  was  set  aside  as  the  first  instalment  of  the  sinking  fund. 

27.  George  N.  Brown  is  an  inventor  and  holds  patent  rights,  processes  and  inventions  which  are  used 
by  different  companies  in  the  manufacture  of  gas  and  electric  engines  and  electrical  appliances.  He  decides 
to  organize  a  corporation  for  the  purpose  of  selling  gas  and  electric  engines,  pumps,  irrigation  machinery 

18 


and  a  full  line  of  electrical  appliances.  A  central  jobbing  house  is  to  be  established  in  Boston  and  selling 
agencies  will  gradually  be  opened  in  all  the  principal  cities. 

The  corporation  is  organized  under  the  laws  of  the  state  of  Maine,  March  1,  1913,  the  incorporators 
being  George  N.  Brown  and  three  of  his  business  associates.  The  corporation  name  is  The  George  N.  Brown 
Company.  The  authorized  capitalization  is  $100,000,  divided  into  500  shares  of  7  per  cent,  non-cumulative 
Preferred  Stock,  par  value  $100  per  share,  and  500  shares  of  Common  Stock,  par  value  $100  per  share.  In 
order  that  the  four  incorporators  may  qualify  as  directors,  each  is  given  two  shares  of  Common  Stock. 
Brown  assigns  to  the  corporation  all  of  his  patent  rights  and  trade  marks  in  exchange  for  100  shares  of 
Preferred  and  492  shares  of  Common  Stock.  He  at  once  donates  to  the  corporation  all  of  his  Preferred 
Stock  and  242  shares  of  his  Common  Stock  to  be  sold  to  procure  working  capital.  He  also  assigns  to  each 
of  the  other  three  incorporators  for  a  private  consideration  one-fourth  of  the  remainder  of  his  holding  of 
Common  Stock. 

King  &  Co.,  stock  brokers,  are  engaged  to  sell  the  Preferred  and  Common  Stock  held  in  the  treasury, 
iheir  commission  to  be  paid  in  treasury  stock.  They  sell  to  John  White  50  shares  of  Preferred  Stock,  taking 
in  payment  two  notes,  one  for  $3,000  and  the  other  for  $2,000,  each  for  3  months  and  bearing  interest  at  5 
per  cent.  The  $2,000  note  is  immediately  discounted  at  the  bank  at  6  per  cent.  For  making  this  sale,  King 
&  Co.  are  given  25  shares  of  Preferred  and  75  shares  of  Common  Stock. 

Brown  is  elected  general  manager  of  the  company  at  a  salary  of  $2,000  per  year  and  travelling  expenses. 
The  payments  made  during  the  month  of  March  are  as  follows:  Office  Furniture,  $200;  Office  Rent, 
$60;  Brown's  salary  for  the  month;  organization  expenses  amounting  to  $250;  this  included  lawyer's  fee, 
stenographer's  service,  publicity  state  corporation  fee,  corporation  seal,  accountant  fee,  corporation  books 
of  account,  etc. 

Make  journal  entries  covering  the  above  transactions,  post  and  take  a  trial  balance. 

(From  New  York  C.  P.  A.  Examination,  June,  1910.) 

The  Patent  Specialty  Con^pany  was  organized  July  1,  1907,  with  a  capital  of  $100,000,  to  manufacture 
novelties.     The  following  transactions  occurred : 

July  1,  1907,  one-half  of  capital  stock  was  subscribed  and  issued,  10  per  cent,  being  called  and  paid  on 
that  date  in  cash.    Legal  and  other  incorporation  expenses,  amounting  to  $500,  were  paid. 

August  20,  1907,  patent,  covering  novelty,  was  purchased  for  $50,000,  payable  one-half  in  stock  and 
one-half  in  cash ;  the  stock  was  issued  and  delivered,  $2,000  paid  in  cash  and  note  given  for  balance,  due  in 
one  month,  6  per  cent,  interest.  The  patent  was  subject  to  royalty  rights  granted  to  the  Novelty  Com- 
pany, which  terminated  at  date  of  purchase.  All  accrued  royalties  were  to  pass  with  patent  and  no  royalty 
rights  were  granted  by  the  Patent  Specialty  Company. 

August  27,  1907,  the  Village  Board  of  Trade  donated  a  lot,  valued  at  $5,000.  in  consideration  of  agree- 
ment to  erect  and  equip  a  plant  at  cost  of  not  less  than  $25,000. 

September  13,  1907,  a  further  call  of  70  per  cent,  was  paid.     The  note  was  paid  at  maturity. 

December  31,  1907,  the  following  facts  existed: 

Payments  on  account  of  salaries,  interest,  insurance,  etc.,  amounted  to  $2,250,  with  $250  accrued ; 
contracts  for  construction  and  equipment  amounting  to  $35,000  had  been  given  which  were  75  per  cent, 
completed  and  40  per  cent,  paid;  royalties  amounting  to  $2,725  had  been  received  and  $190  was  accrued. 

Prepare  journal  entries  to  cover  foregoing  and  statement  to  display  financial  condition  at  December 
:il.  1907. 

29.     (From  Michigan  C.  P.  A.  Examination,  June,  1908.) 

The  Western  Grain  Co.  has  this  day  been  incorporated  under  the  laws  of  this  State  by  the  following 
incorporators:  C.  H.  Benton,  J.  W.  Walters,  F.  Rowland  and  A.  B.  Miller,  all  of  this  city,  with  an  author- 
ized capital  of  $25,000,  into  250  shares  of  $100  each. 

The  purpose  of  this  corporation  is  to  buy  and  sell  all  kinds  of  grain,  and  the  subscriptions  to  the  stock 
of  the  Company  are  as  follows:  ' 

C.  H.  Benton,  60  shares ;  J.  W.  Walters,  GO  shares ;  F.  Rowland,  100  shares,  and  A.  B.  Miller,  30  shares. 

Pursuant  to  an  agreement  between  the  firms  of  Benton  and  Walters  and  F.  Rowland,  and  the  Western 
Grain  Co.,  the  former  two  individual  concerns  agree  to  sell  to  the  latter  all  their  assets,  consisting  of  stock 
Merchandise,  Real  Estate,  Accounts  and  Notes  Receivable,  Goodwill,  etc.,  in  consideration  of  the  as- 
sumption by  the  Western  Grain  Co.,  of  all  the  liabilities  of  the  two  individual  concerns  as  well  as  for  the 
payment  in  capital  stock  of  the  Company  for  the  balance  which  the  assets  may  exceed  the  liabilities.  The 
balance  sheet  of  each  individual  concern,  given  below,  is  taken  as  exhibiting  the  exact  value  of  each  plant. 

19 


The  Goodwill  of  Benton  and  Walters  is  valued  at  $1,500,  while  that  of  F.  Rowland  is  valued  at 
$2,000. 

To  enable  the  corporation  to  carry  out  this  agreement  the  original  Subscriptions  of  Benton,  Walters  and 
Rowland  are  therefor  amended  as  follows: 

C.  H.  Benton  subscribing  20  shares,  Walters  20  shares  and  Rowland  27  shares.  A.  B.  Miller  pays  in 
cash  for  his  subscription  and  Benton,  Walters  and  Rowland  donate  each  5  shares  of  the  capital  stock  of  the 
Company  to  provide  a  reserve  for  contingencies. 

Draft  the  necessary  journal  entries  for  the  opening  of  the  corporation  books  and  all  the  other  facts 
mentioned  above,  and  prepare  a  Balance  Sheet. 

BENTON  AND  WALTER'S  BALANCE  SHEET 

Assets 

Cash $2,300.00 

Notes  Receivable $2,300.00 

Accounts  Receivable 8,600.00 

10,900.00 

Furniture  and  Fixtures • 200.00 

Unexpired  Insurance   68.75 

Merchandise  (Inventory) 931.25 

$14,400.00 
Liabilities 

Notes  Payable   ' $4,160.33 

Accounts  Payable 839.67 

$5,000.00 

Notes  Receivable  Discounted 1,300.00 

C.  H.  Benton  C/A. 4,000.00 

J.  W.  Walters  C/A .'. 4,100.00 

4 

$14,400.00 

F:  ROWLAND'S  BALANCE  SHEET 

Assets 

Real  Estate $5,159.00 

Furniture  and  Fixtures ......:...... 495.00 

Merchandise  (Inventory)    1,196.00 

Notes  Receivable $800.00 

Accounts  Receivable 1,350.00 

2,150.00 

Cash 3,200.00 

$12,200.00 

Liabilities 

Notes  Payable  ■ $1,250.00 

Accounts  Payable .. ... 1,750.00 

$3,000.00 

F.  Rowland  C/A 9,200.00 


$12,200.00 
20 


30.     (From  New  York  C.  P.  A.  Examination,  January,  1902.) 

Charles  and  Robert  Wilson  are  copartners  in  a  manufacturing  business,  trading  under  the  firm  name  of 
Wilson  Bros.    Following  is  a  statement  of  the  firm's  financial  condition  December  31,  1900 : 

Real  estate  and  buildings $165,000         Notes  payable $4,000 

Machinery  and  fixtures 39,000  2,000 

Horses,  trucks  and  harness 4,500  $6,000 

Patents    1,500        Accounts  payable 10,000 

Stocks  and  materials 20,000  10,000 

Notes  and  loans  receivable 5,000  '     10,000 

Accounts  receivable   15,000  4,000 

r-     34,000 

$250,000         Chas.  Wilson  (capital) 150,000 

Robert  Wilson  (capital) 60,000 


$250,000 

A  joint  stock  company  under  'the  corporate  title  of  Wilson  &  Wilson,  incorporated,  is  organized  with 
a  capital  of  $300,000,  of  which  $60,000  is  8  per  cent,  cumulative  preferred  stock  and  $240,000  common  stock 
(both  $100  par  value)  to  acquire  and  conduct  the  business  of  Wilson  Bros.  Charles  and  Robert  Wilson  and 
Henry  Miller  each  subscribe  for  $10,000  of  common  stock.  The  company  votes  to  acquire  the  interest  of 
Charles  and  Robert  Wilson  in  the  business,  real  estate,  plant,  outstanding  accounts,  etc.,  of  Wilson  Bros, 
and  to  assume  the  firm's  indebtedness  of  $40,000,  in  consideration  of  the  sum  of  $210,000,  and  to  pay  there- 
for 2,100  shares  of  the  common  stock  of  the  corporation,  1,500  shares  to  be  issued  in  the  name  of  Charles 
Wilson  and  600  shares  in  the  name  of  Robert  Wilson.  The  company  votes  to  place  a  mortgage  on  its  real 
estate  and  plant  for  $50,000  to  secure  an  issue  of  $50,000  first  m/ortgage  5  per  cent,  gold  bonds  of  the  de- 
nomination of  $1,000  each.  The  creditors  subscribe  for  preferred  stock  to  the  amount  of  50  per  cent,  of 
the  amounts  due  to  them  and  take  bonds  at  par  for  the  remainder. 

Make  all  entries  for  the  foregoing  transactions  in  the  order  of  their  occurrence,  and  prepare  a  Balance 
Sheet. 

31.  The  X  Company  is  incorporated  under  the  Business  Corporation  Law  of  Massachusetts,  January 
1,  1916,  with  an  authorized  capital  of  $100,000.  One  share  of  stock  is  given  to  each  of  the  three  incor- 
porators, A,  B  and  C,  in  order  that  they  may  qualify  as  directors;  five  shares  are  given  to  a  lawyer,  D, 
as  compensation  for  legal  services  performed  in  organizing  the  corporation ;  an  investment  banker  under- 
takes the  sale  of  the  remainder  of  the  stock  to  investors  less  fifty  shares  of  stock,  which  he  is  to  receive 
as  compensation  for  his  services.  The  subscription  books  remain  open  until  March  1.  Payments  for  the 
stock  are  to  be  made  in  four  equal  instalments  on  the  first  day  of  March,  June,  September  and  December. 

On  March  1  the  banker  reports  that  all  the  stock  is  subscribed  for  and  the  first  instalment  is  called  and 
paid.  Fifty  shares  of  stock  are  issued  to  the  banker  for  his  services.  Stock  certificates  are  issued  to  all  sub- 
scribers. 

June  1,  the  second  instalment  is  called  and  paid. 

September  1,  the  third  instalment  is  called  and  paid  by  all  subscribers  except  F,  who  subscribed  for 
10  shares. 

December  1,  the  fourth  and  last  instalment  is  called  and  paid,  F  again  defaulting  on  the  payment  of  his 
instalment. 

January  10,  1907,  the  treasurer  of  the  X  Company  offers  F's  shares  for  sale  at  public  auction.  The 
shares  are  sold  to  G  for  $700.  The  expenses  of  the  sale  amount  to  $25.  A  stock  certificate  for  the  ten 
shares  is  issued  to  G.  After  deducting  expenses  and  interest  on  unpaid  instalments  at  6  per  cent,  the 
surplus  of  the  sale  is  remitted  to  F  upon  the  surrender  of  his  certificate. 

a.  Make  necessary  entries  covering  the  above. 

b.  In  case  $400  is  the  highest  bid  at  auction  for  the  shares  what  action  would  the  directors  take  ? 

c.  instead  of  offering  F's  shares  for  sale  at  auction,  the  directors  elected  to  bring  action  at  law  against 
him  for  the  amount  due  from  him,  together  with  interest  thereon.  The  action  is  entered  on  February  1, 
1917,  for  $535  covering  interest  and  charges.  Judgment  is  obtained  on  March  1.  At  the  end  of  thirty 
days  as  the  judgment  remains  unpaid,  the  directors  declare  all  amounts  previously  paid  by  him  forfeited  to 
the  corporation,  an  entry  of  transfer  of  the  stock  to  the  corporation  is  made,  and  the  original  certificate  is 
declared  void. 

Make  necessary  entries. 

21 


PART  III 

MERGERS,  REORGANIZATIONS,  HOLDING  COMPANIES 

AND  CONSOLIDATIONS 

A  Merger  is  an  absorption  of  one  company  by  another.  In  such  a  case,  the  company  absorbed  loses  its 
identity  completely  and  ceases  to  exist ;  the  absorbing  company  succeeds  to  its  assets,  assumes  its  liabilities 
and  liquidates  the  interests  of  its  stockholders,  or  brinjs  them  in  as  stockholders  of  the  absorbing  company 
on  some  equitable  basis. 

An  Amalgamation  is  a  fusion  of  two  corporations  into  a  new  corporation.  In  such  a  case  both  com- 
panies which  are  amalgamated  are  dissolved  and  the  new  company  succeeds  to  the  assets  and  assumes  the 
liabilities. 

"A  Reorganization  is  a  form  of  financial  readjustment  adopted  in  the  presence  of  real  or  threatened 
financial  trouble,  in  order  that  the  business  of  the  corporation  may  be  continued  under  more  favorable  con- 
ditions. It  follows  a  crisis  of  some  kind.  It  always  involves  a  conspicuous  readjustment  of  the  capital 
liabilities,  ordinarily  accompanied  by  a  reduction  in  fixed  charges  and  by  the  addition  of  new  capital." 
— Dewing. 

A  Holding  Company  is  a  corporation  organized  for  the  purpose  of  acquiring  and  holding  all  or  a  por- 
tion of  the  capital  stock  of  another  corporation  or  corporations.  The  object  to  be  accomplished  is  the 
alliance  of  independent  corporations  in  such  a  manner  that  the  financial  and  commercial  policy  of  the  allied 
companies  may  be  definitely  controlled. 

The  controlled  company  is  spoken  of  as  the  SUBSIDIARY  company ;  the  controlling  company  as  the 
HOLDING  or  PARENT  company. 

A  Consolidated  Balance  Sheet  is  a  balance  sheet  which  represents  the  true  financial  condition  of  related 
companies  regarded  as  a  unit  and  submitted  for  the  information  of  the  outside  public.  The  most  common 
use  of  the  consolidated  balance  sheet  is  to  show  the  combined  financial  strength  of  a  holding  company  and 
its  subsidiary  company  or  companies;  also  to  show  in  a  single  statement  the  assets  and  liabilities  of  a  main 
office  and  its  branches  or  agencies. 

In  the  case  of  a  holding  company,  there  is  such  an  overlapping  of  interests  that  the  respective  stock- 
holders of  the  holding  company  and  of  the  several  subsidiary  companies  are  unable  to  determine  from  a 
balance  sheet  taken  from  the  books  of  each  company  what  the  real  financial  position  of  the  combined  under- 
taking is ;  this  is  true  because  such  a  balance  sheet  would  not  reveal  any  of  the  inter-relations  of  the  sub- 
sidiary companies  to  the  holding  company  or  vice  versa.  A  consolidated  balance  sheet  obviates  this  difficulty 
by  representing  the  true  condition  of  the  related  companies  as  viewed  in  the  light  of  a  single  undertaking. 

It  must  be  distinctly  understood  that  a  consolidated  balance  sheet  is  not  the  balance  sheet  of  any  corpo- 
ration, but  that  it  merely  represents  a  condition  of  affairs  following  the  elimination  of  all  inter-company 
relations.    As  such,  a  consolidated  balance  sheet  has  no  legal  status. 

In  the  preparation  of  such  balance  sheet  the  assets  and  liabilities  of  the  related  companies  are  com- 
bined only  in  so  far  as  they  affect  the  interests  of  outside  holders  of  the  securities  of  the  companies,  the 
following  items  being  eliminated : 

1.  Inter-corri|pany  debts ;  items  which  appear  as  Accounts  Receivable  or  Payable  on  one  balance  sheet 
and  as  the  exact  opposite  on  the  other. 

2.  Capital  stock  of  one  company  held  by  another. 

3.  Bonds  of  one  company  held  by  another. 

4.  Any  other  inter-company  items  which  tend  to  off-set  each  other  when  the  accounts  are  combined. 

When  all  items  enumerated  above  have  been  elinrnated  the  consolidated  statement  shows  the  condition 
of  the  related  companies  regarded  as  a  unit,  in  their  relation  to  the  outside  public.  The  accounts  and  notes 
receivable  are  those  due  from  external  sources ;  the  accounts  and  notes  payable,  those  due  to  outside 
parties ;  the  capital  stock  and  bond  items,  those  in  the  hands  of  outside  investors. 

A  question  which  frequently  arises  in  preparing  a  consolidated  balance  sheet  relates  to  the  premium  or 
the  discount  at  which  the  capital  stock  of  one  related  company  may  be  carried  on  the  books  of  another  of 
the  companies. 

22 


Arthur  Lowes  Dickinson  says  that  such  a  premium  or  discount  "represents  an  addition  to  or  diminution 
of  Goodwill  in  the  final  balance  sheet."  Other  authorities  are  of  the  opinion  that  such  items  should  be 
merged  with  capital  Surplus. 

A  Consolidated  Profit  and  Loss  Statement  is  prepared  on  the  same  general  principles.  "Profits  result- 
ing to  one  company  out  of  sales  to  another  are  eliminated.  Only  sales  and  purchases  to  and  from  the 
outside  public  are  included,  so  that  no  profits  are  considered  except  those  made  on  deliveries  outside  the 
organization.  In  other  words,  the  whole  organization  is  considered  as  merely  a  series  of  separate  works 
under  the  same  ownership;  and  the  same  accounting  principles  which  would  apply  to  a  corporation  owning 
several  factories  are  applied  to  the  corporation  owning  the  stocks  of  a  number  of  subsidiary  companies,  all 
the  companies  in  the  group  themselves  owning  and  operating  their  own  factories." 

In  compiling  a  consolidated  balance  sheet  the  work  may  be  simplified  by  using  analysis  paper  with 
columns  headed  as  illustrated  in  the  outline  given  below.  Let  it  be  assumed  that  X  is  a  holding  company 
and  Y  and  Z  are  subsidiary  companies. 

CONSOLIDATED  BALANCE  SHEET  OF  COMPANIES  X,  Y  AND  Z 

December  31,  1915 
Assets 


Assets 

Company 
X 

Company 
Y 

Company 
Z 

Eliminations 

Consolidated 
Assets 

LlABI 

LITIES 

Liabilities 

Company 
X 

Company 
Y 

Company 
Z 

Eliminations 

Consolidated 

Capital  and 

Surplus 

Entries  to  be  Made  Involving  a  Merger  or  an  Amalgamation 
Entries  on  the  Books  of  The  Vendee  Company 

1.  Debit  all  assets   (including  Goodwill)   taken  over  and  credit  the  vendor  company,  or  the  trustee. 

2.  Debit  the  vendor  company  or  trustee  and  credit  the  accounts  representing  liabilities  assumed  by  the 
vendee  company. 

3.  Debit  the  vendor  company's  account  and  credit  Cash,  Capital  Stock,  or  Bonds  Outstanding  for 
whatever  was  given  to  the  vendor  company  in  exchange  for  the  net  assets. 

4.  If  the  amount  paid  for  the  net  assets  is  in  excess  of  the  value  at  which  they  have  been  brought 
onto  the  book  charge  Organization  Expenses  and  credit  the  vendor  company's  account  for  the  difference. 
If  the  amount  paid  for  the  net  assets  is  less  than  the  value  at  which  they  are  carried  onto  the  books  debit 
the  vendor  company's  account  and  credit  Working  Capital  Donated  or  Capital  Surplus. 

5.  Charge  any  expenses  that  have  been  incurred  incidental  to  the  absorption  of  the  vendor  company 
to  Organization  Expenses.     The  organization  expenses  are  presumably  written  off  over  a  stated  period  of 

fin  tries  on  the  Books  of  the  Vendor  Company  (First  Method). 

1.  Bring  on  to  the  books  the  Goodwill  incidental  to  the  sale  of  the  business  by  charging  Goodwill 
account  and  crediting  Surplus. 

Charge  the  assets  (including  Goodwill)  sold  to  the  vendee  company  or  the  trustee  by  debiting  the 
vendee  company  and  crediting  the  various  asset  accounts. 

23 


3.  If  the  vendee  company  assumes  any  or  all  of  the  liabilities  of  the  vendor  company,  credit  the 
vendee  company  or  trustee  for  the  liabilities  assumed  by  debiting  the  various  liability  accounts  and  crediting 
the  vendee  company's  account. 

4.  Credit  the  vendee  company  for  cash,  capital  stock,  bonds,  or  other  assets  received  from  them  in 
payment  for  the  net  assets  by  debiting  the  proper  asset  account  or  accounts  and  crediting  the  vendee 
company. 

5.  If  the  amount  received  from  the  vendee  company  in  payment  of  the  net  assets  is  greater  than  the 
value  at  which  they  are  carried  on  the  books  of  the  vendor  company,  debit  the  vendee  company's  account 
and  credit  Profit  and  Loss  in  Liquidation  for  the  difference.  If  the  amount  received  in  payment  of  the 
net  assets  is  less  than  their  book  value,  debit  Profit  a  id  Loss  in  Liquidation  and  credit  the  vendee  com- 
pany's account. 

6.  Pay  off  any  liabilities  not  assumed  by  the  vendee  company  debiting  the  proper  liability  accounts 
and  crediting  Cash. 

7.  If  any  expenses  have  been  incurred  incidental  to  the  sale  of  the  business,  charge  the  proper  expense 
accounts  and  credit  Cash;  the  detailed  expense  accounts  will  then  close  into  Profit  and  Loss  in  Liquidation 
by  debiting  Surplus  and  crediting  the  detailed  expense  accounts. 

8.  Transfer  the  net  profit  or  loss  incidental  to  the  sale  of  the  business  to  Surplus  account. 

9.  Charge  Capital  Stock  and  Surplus  (provided  it  shows  a  credit  balance)  and  credit  Cash,  Capital 
Stock  of  the  Vendee  Company,  Bonds  of  the  Vendee  Company  and  any  other  accounts  representing  assets 
distributed  among  the  stockholders. 

Entries  on  the  Vendee  Company's  Books   {Second  Method) 

1.  Transfer  all  assets  sold  to  the  vendee  company  to  a  Realization  account  by  debiting  realization  for 
the  total  assets  sold  and  credit  the  various  asset  accounts. 

2.  Transfer  any  liabilities  assumed  by  the  vendee  company  to  the  Realization  account  by  debiting  the 
proper  liability  accounts  and  crediting  Realization  account. 

3.  Debit  the  Vendee  Company's  or  trustee's  account  and  credit  Realization  account  for  the  agreed  on 
price  of  the  net  assets  turned  over  to  the  vendee  company. 

4.  Bring  on  to  the  books  the  cash,  stock  or  bonds  received  from  the  vendee  company  in  payment  for 
the  net  assets  by  debiting  the  proper  assets  accounts  and  crediting  the  Vendee  Company's  account. 

5.  If  there  have  been  any  expenses  incurred  in  connection  with  the  sale  of  the  business,  debit  the 
proper  expense  accounts  and  credit  Cash. 

6.  Close  the  accounts  representing  expenses  incurred  in  connection  with  the  sale  of  the  business  into 
the  Realization  account  by  debiting  Realization  and  crediting  the  detailed  expense  accounts. 

7.  Transfer  the  net  profit  or  loss  on  the  sale  of  the  business  as  represented  by  the  balance  of  the 
Realization  accounts  to  Surplus. 

8.  Make  the  entry  representing  the  distribution  among  the  stockholders  of  cash,  stock  or  bonds  of  the 
vendee  company  and  assets  not  sold  by  debiting  Capital :  Stock  and  Surplus  accounts  and  crediting  the 
accounts  representing  assets  distributed.  • 

Entries  to  be  Made  when  a  Corporation  Voluntarily  Liquidates 
First  Method 

1.  Debit  Cash  or  the  other  proper  asset  account  or  accounts  with  the  amounts  or  items  received  in 
realizing  on  the  assets  of  the  concern  and  credit  the  various  asset  accounts. 

2.  Charge  the  various  liability  accounts  and  cred't  Cash  for  amounts  paid  in  liqudiation  of  the  liabilities. 

3.  Close  any  profits  that  have  been  realized  f  ro  n  the  sale  of  the  assets  into  a  Profit  and  Loss  in 
Liquidation  account  by  debiting  the  accounts  representing  assets  which  have  been  disposed  of  at  a  profit, 
and  crediting  Profit  and  Loss  in  Liquidation. 

4.  Close  the  losses  sustained  in  realizing  on  assets  into  the  Profit  and  Loss  in  Liquidation  account 
by  debiting  this  account  and  crediting  the  accounts  representing  assets  which  have  been  disposed  of  at  less 
than  their  book  value. 

24 


5.  Close  the  profit  resulting  from  liabilities  not  paid  in  full  into  the  Profit  and  Loss  in  Liquidation 
account  by  charging  the  accounts  representing  liabilities  not  paid  in  full  and  crediting  Profit  and  Loss  in 
Liquidation. 

6.  Gose  the  expenses  incurred  during  the  period  of  liquidation  into  Profit  and  Loss  in  Liquidation 
account  by  debiting  this  account  and  crediting  Liquidation  Expenses  or  the  detailed  expense  accounts. 

'.  Transfer  the  profit  or  loss  incidental  to  the  liquidation  of  the  business  from  the  Profit  and  Loss 
in  Liquidation  account  to  Surplus  or  Deficit. 

8.  Debit  Capital  Stock  account  and  Surplus  Account  (provided  it  shows  a  credit  balance)  and  credit 
Cash  and  other  asset  accounts  representing  cash  and  other  assets  distributed  to  stockholders.  (If  the 
Surplus  or  Deficit  account  has  a  debit  balance,  this  account  will,  of  course,  be  credited  when  the  final  dis- 
tribution is  made.) 

Second  Method 

1.  Debit  Realization  and  Liquidation  for  the  total  assets  to  be  realized  and  credit  the  accounts  repre- 
senting the  assets  to  be  realized. 

2.  Debit  the  various  liability  accounts  to  be  liquidated  and  credit  realization  and  liquidation  for  the 
total  liabilities  to  be  liquidated. 

3.  Debit  Cash  or  other  accounts  representing  items  received  in  realizing  on  assets  disposed  *of  and 
credit  Realization  and  Liquidation  for  amounts  received  in  realizing  on  assets. 

4.  Debit  Realization  and  Liquidation  and  credit  Cash  for  amounts  paid  in  liquidation  of  liabilities. 

5.  Charge  Realization  and  Liquidation  for  expenses  incurred  during  the  period  of  liquidation,  credit- 
ing Liquidation  Expenses  or  the  proper  detailed  expense  accounts. 

6.  Transfer  the  profit  or  loss  incidental  to  the  liquidation  of  the  business  from  the  Realization  and 
Liquidation  account  to  Surplus  or  Deficit,  as  the  case  may  be. 

7.  Debit  Capital  Stock  and  Surplus  accounts  and  credit  Cash  and  other  assets  distributed  to  the  stock- 
holders. 

Bibliography  on  Holding  Companies  and  Consolidations 

Dickinson,  A.  Lowes,  "Accounting  Practice  and  Procedure'' — Chap.  XIII. 
Montgomery,  Robert  H.,  "Auditing— Theory  and  Practice  '—Chap.  XXX. 
Esquerre,  P.  J.,  "Applied  Theory  of  Accounts'— Chap.  XXXVIII. 
Klein,  Joseph  J.,  "Elements  of  Accounting" — pp.  145-154. 
Wildman,  John  R.,  "Principles  of  Accounting" — pp.  296-302. 

Wright,  Allan  W.,  "Consolidation  of  Balance  Sheets  in  Holding  Company  Accounting" — Journal  of  Accountancy, 
January,  1915. 

Problems 

32.  Company  A  buys  a  controlling  interest  (810  shares)  in  Company  B  for  $81,000.  Company  B  has 
stock  issued  and  outstanding  of  $150,000. 

Later  on  a  majority  of  the  stockholders  of  Company  B  vote  to  accept  two  shares  of  stock  of  Company 
A  for  three  shares  of  Company  B,  Company  A  to  take  over  all  assets  and  assume  all  liabilities  of  Company 
B  at  their  book  values.  The  stockholders  of  Company  B  elect  a  trustee  to  wind  up  its  affairs.  He  calls  in 
all  outstanding  shares  of  Company  B,  cancels  them,  ruthorizes  Company  A  to  issue  the  stock  it  agrees  to 
w  in  acordance  with  a  list  which  he  furnishes  showing  the  names  of  Company  B  stockholders,  the  num- 
ber of  Company  B  shares  they  have  turned  in  and  the  number  of  shares  of  Company  A  stock  to  which  they 
are  entitled.  Company  A  issues  the  shares  in  accord  ince  with  the  list  furnished  and  delivers  such  shares 
to  the  trustee.  He  delivers  them  to  the  Company  B  stockholders,  procuring  their  receipts  therefore  which 
he  turns  back  to  Company  A. 

a.     Show  by  means  of  journal  entries  how  the  affairs  of  Company  B  would  be  wound  up. 

h.     Show  by  means  of  journal  entries  how  the  merger  would  be  effected  on  Company  A  books. 

25 


BALANCE  SHEET  OF  COMPANY  B 


Assets 


Cash 

Accounts  Receivable 
Inventory  


, $3,000 

47,000 

160,000 

Plant  and  Equipment 150,000 


Liabilities 

Accounts  Payable $61,000 

Notes  Payable 140,000 

Capital  Stock   150,000 

Surplus 9,000 


$360,000 


$360,000 


33.     (From  Massachusetts  C.  P.  A.  Examination,  April,  1911.) 

A.  B.  Co.  was  an  old  established  corporation  with  a  capital  stock  liability  of  $600,000.  C.  D.  Co.  was 
a  corporation,  organized  June  1,  1907,  at  which  time  it  issued,  for  cash,  $1,000  of  $600,000  capital  stock 
authorized.  The  $1,000  capital  stock  issued  by  C.  D.  Co.  was  acquired  by  A.  B.  Co.,  June  1,  1907.  The 
par  value  of  the  shares  of  both  corporations,  was  $100.  December  31,  1907,  C.  D.  Co.  bought  of  A.  B.  Co., 
all  of  the  latter's  property,  except  the  ten  shares  stock  of  C.  D.  Co.,  and  assumed  all  of  the  debts  of 
A.  B.  Co. ;  issuing,  to  the  latter,  in  settlement  therefor,  the  remainder  of  C.  D.  Co.'s  authorized  capital  stock ; 
entered,  in  its  books,  the  property  acquired  and  debts  assumed,  at  the  respective  amounts  shown  in  the  books 
of  A.  B.  Co. ;  and  continued  as  a  going  concern.  At  the  same  date,  A.  B.  Co.  liquidated  its  affairs,  dis- 
tributing to  its  shareholders  the  capital  stock  which  it  received  from  C.  D.  Co. 

BALANCE  SHEET  OF  A.  B.  CO. 
December  31,  1917 


Cash  advanced  to  C.  D.  Co.,  December 

31,  1907 $21,800 

Notes  Receivable  42,000 

Accounts  Receivable 145,200 

Merchandise    540,000 

Real  Estate  and  Machinery 150,000 

Stock  of  C.  D.  Co 1,000 


C.  D.  Co.,  Current  Account $31,600 

Notes  Payable 125,000 

Accounts  Payable 43,400 

Capital  Stock  Account 600,000 

Profit  and  Loss  Account 100,000 


$900,000 


$900,000 


The  trial  balance  of  C.  D.  Co.  contained  a  credit:  "Cash  advanced  by  A.  B.  Co.,  December  31,  1907," 
$21,800 ;  and  a  debit :  "A.  B.  Co.,  Current  Account,  $31,600."  Write  the  journal  entries,  stating  sufficient 
explanation  for  each,  to  close  the  books  of  A.  B.  Co.,  and  to  spread  the  above  transactions  of  December  31, 
1907,  on  the  books  of  C.  D.  Co. 


34.     (From  Masachusetts  C.  P.  A.  Examination,  June,  1913.) 

The  A.  B.  Company,  capital  stock  $200,000,  represented  by  cash  on  hand,  has  bought  all  of  the  capital 
stock  of  the  C.  D.  Company,  a  going  concern.  In  payment,  the  A.  B.  Company  has  used  $50,000  cash,  and 
has  issued  $100,000  First  Mortgage  Bonds,  dated  January  1,  1900,  due  January  1,  1930.  These  bonds  bear 
interest  at  5%,  payable  January  1  and  July  1  of  each  year.  The  purchase  was  made  March  31,  1900,  and 
at  that  date  the  balance  sheet  of  the  C.  D.  Company  was  as  follows : 


Assets 


Liabilities 


Cash  

Accounts  Receivable  . 

Merchandise 

Plant  and  Machinery 


$5,000 
40,000 
35,000 
60,000 


Notes  Payable  . . . 
Accounts  Payable 
Capital  Stock 
Surplus    


$5,000 

15,000 

100,000 

20,000 


$140,000 


$140,000 


On  June  10,  1900,  a  dividend  of  10%  was  declared  on  C.  D.  Company  stock,  payable  July  1,  1900,  and 
the  A.  B.  Company  took  over  and  succeeded  to  the  business. 

26 


At  the  closing  of  the  books,  after  payment  of  the  dividend  on  July  1,  1900,  the  balance  sheet  of  the 
C.  D.  Company  was  as  follow  s  : 

Assets  Liabilities 

Cash $500  Accounts  Payable $5,000 

Accounts  Receivable 55,000  Capital  Stock 100,000 

Merchandise    19,500  Surplus 30,000 

Plant  and  Machinery 60,000 

$135,000  $135,000 

Show  the  balance  sheet  of  the  A.  B.  Company  as  at  March  31,  1900,  and  as  at  July  1,  1900. 

35.     (From  Massachusetts  C.  P.  A.  Examination,  October,  1914.) 
The  Balance  Sheet  of  the  A.  B.  C.  Company  is  as  follows: 

Assets 
Current : 

Cash $25,000.00 

Accounts  Receivable 350,000.00 

Notes  Receivable 1,000.00 

$376,000.00 

Work  in  progress  at  cost 500,000.00 

Less  advanced  payments ^400,000.00 

$100,000.00 

Merchandise,  Materials  and  Supplies 250,000.00 

Investments :  350,000.00 

Acme  Co.  Bond 1,000.00 

Stock  in  other  companies 200,000.00 

201,000.00 

Plant :  '  $927,000.00 

Real  Estate,  Main  Plant 1,000,000.00 

Less  Reserve  for  Depreciation 50,000.00 

950,000.00 

Real  Estate,  Branch 400,000.00 

Less  Mortgage 50,000.00 

350,000.00  m 

Machinery  and  Equipment 1,000,000.00 

Less  Reserve  for  Depreciation 75,000.00 

925,000.00 

2,225,000.00 

Goodwill :  .  $3,152,000.00 

Goodwill  Account  1,000,000.00 

Patent  Rights 600,000.00 

Organization  Expense 100,000.00 

1,700,000.00 

Deferred  Charges: 

Unexpired  Insurance 20,000.00 

Prepaid  Interest 5,000.00 

Personal  Advances  2,000.00 

27,000.00 

Accounts  Receivable  in  Suspense 300,000.00 

2,027,000.00 

Deficit   3,016,000.00 

$8,195,000.00 
27 


Liabilities 
Current : 

Accounts  Payable  $300,000.00 

Accrued  Wages 10,000.00 

Accrued  Taxes 5,000.00 

Accrued  Commissions 10,000.00 

1 $325,000.00 

Notes  Payable  800,000.00 

1 

$1,125,000.00 
Capital  Stock: 

Preferred    2,000,000.00 

Common . 5,000,000.00 

7,000,000.00 

Reserves : 

For  Completion  of  Contracts 70,000.00 


$8,195,000.00 

A  reorganization  is  effected  by  a  new  company,  the  X.  Y.  Z.  Company,  taking  over  the  business.    The 
new  company  starts  with  the  following  bonded  debt  and  capitalization: 

First  Mortgage  6%  20-year  bonds .  .• $1,000,000 

7%  Preferred  Stock 2,000,000 

Common  Stock 1,250,000 


"   •  $4,250,000 

The  Stockholders  of  the  old  Company  agree  to  participate  in  the  reorganization  upon  the  following 
terms : 

Ninety  (90)  per  cent  of  the  Preferred  Stockholders  pay  $15  per  share  on  their  holdings,  $100  par  value, 
and  surrender  their  stock,  and  receive  in  exchange  $15  First  Mortgage  6%  Bonds,  and  equal  shares  Preferred 
Stock  of  the  new  Company  $100  par  value,  and  also  receive  $7  per  share  in  lieu  of  accrued  dividends. 

Ten  (10)  per  cent,  of  the  Preferred  Stockholders  do  not  pay  the  $15  per  share,  but  surrender  their 
stock  in  exchange  for  Preferred  Stock  of  the  new  company  to  an  amount  equal  to  80  per  cent,  of  their 
holdings  and  $7  per  share  in  lieu  of  accrued  dividends,  computed  upon  80%  of  their  holdings. 

Common  Stockholders  surrender  their  stock  and  pay  $5  per  share  on  the  whole  outstanding  common 
stock  of  the  old  company,  par  value  $100,  and  receive  in  exchange  $20  in  First  Mortgage  Bonds  of  the  new 
company  and  one  (1)  share  Common  Stock  of  the  new  company  par  value  $100  for  each  4  shares  so 
surrendered. 

The  balance  of  the  bonds  were  used  at  par  to  pay  debts  of  the  old  company,  one-half  each  on  Notes 
Payable  and  Accounts  Payable,  and  $300,000  of  Notes  Payable  is  paid  in  Cash.  Accrued  Profit  on  work 
in  progress  is  estimated  at  $100,000. 

Draft  Balance  Sheet  of  the  X.  Y.  Z.  Company  after  conclusion  of  reorganization. 

36.     (From  New  York  C.  P.  A.  Examination,  February,  1908.) 

A  corporation  is  formed  with  a  capital  stock  of  $500,000  (of  which  $200,000  is  preferred  and  $300,000 
is  common  stock)  to  acquire  and  consolidate  three  existing  corporations  designated  as  A,  B  and  C,  and 
having  the  following  status  respectively: 

Book 

Accounts  Liabilities  Surplus  Deficit  Capital 

A    $171,000  $56,000  $15,000  $100,000 

B    165,000  80,000                       $5,000  90,000 

C    108,000  47,000  6,000  55,000 


$5,000 


$245,000 


$444,000  $183,000  $21,000 

The  several  vendor  companies  contract  with  the  promoter  to  sell  their  assets,  excluding  cash  funds  as 
above  stated  and  including  goodwill,  at  the  following  prices  respectively,  viz. :  A,  $125,000 ;  B,  $100,000 ; 

28 


<&: 


C,  $75,000 ;  payable  one-half  in  cash  and  one-half  in  preferred  stock  to  be  issued  therefor  by  the  new  com- 
pany, which  is  also  to  assume  all  outstanding  obligations. 

The  promoter  or  vendor  contracts  with  the  new  or  vendee  company  to  acquire  the  several  properties 
subject  to  the  liabilities  as  stated  and  to  provide  an  additional  working  capital  of  $100,000  cash,  and  to 
take  in  payment  therefor  the  entire  authorized  capital  stock  of  the  new  company,  out  of  which  the  sub- 
scribing incorporators  and  directors  will  acquire  their  stock  by  purchase  from  the  underwriters. 

The  common  stock  is  under-written  by  bankers  at  80%  with  bonus  of  one  share  of  preferred  to  each 
10  shares  of  common  stock.  The  bankers  are  also  to  take  an  additional  $10,000  of  preferred  stock  at  par, 
as  part  of  their  agreement. 

a.  Frame  the  opening  entries  and  balance  sheet  of  the  vendee  company,  showing  the  costs  respectively- 
of  assets,  goodwill  and  organization  expense  on  the  assumption  that   the   terms   of   the  several   contracts 
are  known  to  all  the  parties  concerned  a/id  form  the  basis  of  the  initial  values  established. 

b.  Frame  closing  entries  of  "A"  Company,  showing  cancelation  of  stock  and  distribution  of  proceeds 
of  sale  among  stockholders. 

c.  Show  promoter's  compensation  or  profit  for  effecting  the  consolidation. 

37.  (From  New  York  C.  P.  A.  Examination,  June,  1901.) 

A  syndicate,  formed  for  the  purpose  of  acquiring  controlling  interests  in  several  manufacturing  com- 
panies, had  pooled  the  sum  of  $1,200,000,  and  the  securities  purchased  therewith  had  been  placed  in  the 
hands  of  a  trustee. 

A  company  was  organized  with  a  subscribed  capital  of  $5,000,000  (shares  $100  each)  of  which  $2,000 
was  paid  in  cash. 

By  the  terms  of  an  agreement  entered  into  between  the  company  and  the  trustee,  49,980  shares  of 
stock  were  to  be  issued  to  him  for  all  the  securities  held  by  him  and  $624,375  in  cash  was  to  be  paid  by 
him  to  the  company,  provision  being  made,  however,  that  in  case  the  trustee  failed  to  pay  the  required 
amount  of  cash,  he  was  to  turn  back  to  the  company  3  1/5  shares  of  stock  for  each  $100  that  he  failed 
to  pay. 

The  trustee  being  unable  to  pay  any  cash,  returned  stock  in  lieu  thereof,  as  provided. 

The  company  then  offered  the  members  of  the  syndicate  $3,000  in  securities  at  par,  and  25  shares  of 
stock  for  each  $3,000  contributed  to  a  second  pool  of  $1,200,000.  This  offer  was  accepted  and  half  of  the 
second  pool  paid  in,  securities  and  stock  being  issued  as  agreed. 

Make  entries  for  the  books  of  the  company  which  will  give  proper  expression  to  the  foregoing  transac- 
tions.   Prepare  a  balance  sheet. 

38.  (From  Examinations  for  Admittance  to  the  American  Institute  of  Accountants,  June,  1917.) 

BALANCE. SHEET  OF  A 

Property  leases  and  goodwill $470,133       'Capital  Stock $400,000 

Fixtures 81,791         Bonds 100,000 

handitt  Inventory 126,538         Sundry  Creditors 59,975^ 

Sundry  Debtors 54,642        Surplus 135,886" 

Sinking  Fund  Assets  II  .690         Pension  Fund  5,460 

Cash  on  hand 20,204        Sinking  Fund 11 ,690 

Profit  and  Loss 51,987 

$764,998  •  $76 1 /.''.is 


29 


Cash 

Investments : 

Short  time  Loans 

Stock  of  A  at  Par 

Stock  of  C  at  Par 

Bonds  of  Company  A  at  Par  (cost)  . . 
Railroads  and  other  Bonds  at  present 

value 

Merchandise 

Sundry  Debtors 

Prepaid  Expense 

Goodwill  and  Trade  Marks 

Plant  and  Machinery 


BALANCE  SHEET  OF  B 

$51,195        Preferred  Stock $800,000 

Common  Stock 123,000 

108,000         Surplus 160,000 

100,000        Accounts  Payable 141,235 

20,000         Notes  Payable 4,728 

50,000         Profit  and  Loss 217,254 

126,070 
366,437 

15,563 

12,715 
422,900 
173,337  , 


$1,446,217 


$1,446,217 


BALANCE  SHEET  OF  C 
Land  and  Buildings $41,438         Capital  Stock $120,000 


Machinery 

Merchandise 

Office  Furniture  

Cash  

Accounts  Receivable 

Goodwill  at  Cost 

Bonds  of  Company  A,  5,000  at  Cost 


20,577 
19,610 
50 
14,730 
21,245 
81,867 
5,030 

$204,547 


Bonds    

Surplus 

Dividend  Declared 
Accounts  Payable  . 
Profit  and  Loss  . . . 


30,675 

34,000 

1,650 

5,879 

12,343 


$204,547 


Company  D  is  organized  for  the  purpose  of  consolidating  the  three  companies  whose  balance  sheets 
are  given  above,  engaged  in  allied  businesses.  Company  D  is  authorized  to  issue  $2,000,000  preferred 
stock,  and  $350,000  common  stock.  It  arranges  to  buy  stock  of  the  subsidiary  companies  on  the  following 
terms : 


For  Each  Share  of 


1). 


Is  Offered  of 
Preferred  Stock 


D.  Common  Stock 
Yz  share 


A.  Stock 1  share 

B.  Preferred 2  shares 

B.  Common 1  share 

C.  Stock  1  share Y\  share 

On  these  terms  D  acquires  $290,000  of  A  stock,  all  the  preferred  stock  of  B,  $100,000  of  common  stock 
of  B,  and  $100,000  of  C  stock.  The  stock  bought  was  obtained  from  individual  holders,  the  stock  of  A  and 
C  held  by  B,  as  well  as  some  stock  held  by  non-consenting  stockholders,  not  being  acquired.  The  remaining 
preferred  stock  of  D  was  held  by  the  company.  The  rest  of  the  common  stock  authorized  was  sold  for  cash 
at  par.     The  expenses  of  organization  amounted  to  $5,000  and  were  paid  in  cash. 

Of  the  accounts  receivable  held  by  C,  $20,000  were  due  from  B.  Of  the  sundry  debtors  on  the  books 
of  B,  $5,500  were  due  from  A. 

Company  D  also  issues  $500,000  bonds  which  it  sells  at  105  and  pays  $500,000  cash  for  a  plant  which 
it  buys  direct. 

Prepare  a  consolidated  balance  sheet. 


39.     (From  Virginia  C.  P.  A.  Examination,  October,  1911.) 

The  stockholders  of  A  Company  and  B  Company  have  decided  to  form  a  new  corporation  (C  Com- 
pany), which  is  to  take  over  all  the  assets  and  assume  all  the  liabilities  of  both  the  old  companies. 
The  holders  of  Preferred  Stock  of  the  old  companies  are  to  receive  an  equal  number  of  shares  of 
Preferred  Stock  of  the  new  company.    The  holders  of  Common  Stock  are  to  take  Common  Stock  of  the 

30 


new  company,  at  par,  to  an  amount  equal  to  the  book  value  of  their  holdings  in  the  old  companies.  Before 
determining  the  book  value  of  the  old  Common  Stock,  however,  an  amount  equal  to  two  per  cent,  of  the 
accounts  and  Bills  Receivable  of  each  company  is  to  be  deducted  from  its  Surplus  and  carried  to  a  Reserve 
Account,  to  provide  for  contingent  losses. 

The  condition  of  the  old  companies  is  as  follows: 


Assets 

A  Co. 

Cash $20,231.74 

Accounts  Receivable 296,059.14 

Bills  Receivable    8,245.08 

Merchandise  Inventory   212,636.81 

Land  and  Buildings 42,689.42 

Machinery 31,222.97 

Furniture  and  Fixtures 2,500.00 

Investments    8,000.00 

Prepaid  Taxes  and  Insurance 1,014.20 

$622,599.36 


B  Co. 

$43,123.81 

759,911.06 

35,342.09 

393,937.46 

174,156.97 

69,160.35 

5,000.00 

4,550.00 


$1,487,528.22 


Liabilities 

Accounts  Payable  $204,669.18 

Bills  Payable  86,844.10 

Preferred  Stock 100,000.00 

Common  Stock   150,000.00 

Surplus  81,086.08 


$622,599.36 

The  holders  of  Common  Stock  in  the  old  companies  are  as  follows : 

A  Co. 

Smith 400  shares 

Jones  300  shares 

Brown  150  shares 

Black  50  shares 

White    600  shares 

Green 

Henry   


1,500  shares 


$244,169.44 
227,454.72 
200,000.00 
400,000.00 
415,905.06 

$1,487,528.22 


B  Co. 
1,200  shares 

2,000  shares 

500  shares 
300  shares 

4,000  shares 


Draft  the  Journal  entries  necessary  to  effect  the  consolidation. 

Show  the  final  book  value  of  Common  Stock  of  each  of  the  old  companies. 

Show  the  number  of  shares  of  Common  Stock  of  the  new  company  to  be  received  by  each  of*,  the 
holders  of  Common  Stock  of  the  old  companies. 

Prepare  a  Balance  Sheet,  showing  condition  of  C  Company,  after  taking  over  the  assets  and  liabilities 
of  the  old  companies. 

I".     |  From  Massachusetts  C.  P.  A.  Examination,  October,  1915.) 

A  blank"  firm  is  engaged  in  the  lumber  business  owning  timber  lands  in  fee  and  licensed,  saw  mills 
and  other  equipment  and  90%  of  the  stock  in  another  lumber  corporation.     They  instruct  an  accountant  to 


31 


examine  their  accounts  for  the  purpose  of  ascertaining  the  true  financial  position.    The  following  is  a  trial 
balance  from  the  Ami's  books  December  31,  1914,  after  closing: 

Dr.  Cr. 

Cash $20,000.00 

Accounts  Receivable 150,000.00 

Logs  and  Mfg.  Lumber 200,000.00 

Advances  on  account  of  season's  logging  operations 100,000.00 

Investments  in  controlled  company  900  shares  (cost) 99,000.00 

Timber  lands  (cost) 500,000.00 

Mill  Plants  and  Equipment  (cost) 250,000.00 

Loans  Payable $150,000.00 

Accounts  Payable 250,000.00 

Deposits  on  Orders 50,000.00 

Mortgage  on  Plants 150,000.00 

Controlled  Company  Current  Acct 20,000.00 

Partner's  Capital 739,000.00 


1,339,000.00  1,339,000.00 

The  controlled  company's  trial  balance  December  31,  1914,  was: 

Cash $5,000.00 

Accounts  Receivable 70,000.00 

Logs  and  Mfg.  Lumber 40,000.00 

Timber  lands 50,000.00 

Mills 100,000.00 

Mills  Payable 100,000.00 

Blank  Firm 30,000.00 

Accounts  Payable 20,000.00 

Capital 100,000.00 

Surplus   15,000.00 


$265,000.00  $265,000.00 

The  following  matters  disclosed  by  the  accountant's  examination  were  not  included  in  the  accounts 
prior  to  closing  December  31,  1914.  The  appraised  value  of  the  timber  lands  of  the  firm  consisting  of  200 
square  miles  is  $3,000  per  square  mile  and  those  of  the  controlled  company  20  square  miles  at  the  same 
price  per  square  mile,  and  the  owners  wish  these  taken  up  in  the  accounts.  There  are  unpaid  license  fees 
on  the  timber  lands  of  the  firm  due  in  1920  of  $8.00  per  square  mile  which  must  be  paid  to  retain  the 
privilege  of  cutting  the  timber  under  the  stumpage  agreement.  $50,000  of  the  Bills  Payable  of  the  con- 
trolled, company  were  endorsed  by  the  firm  and  the  latter  also  discounted  customers'  notes  amounting  to 
$25,000.  The  difference  in  the  intercompany  accounts  consisted  of  a  charge  by  the  firm  to  advances  on 
logging  operations  instead  of  to  the  controlled  company.  There  were  prepaid  taxes  in  the  controlled 
company  of  $2,000.    The  stock  on  hand  of  logs  and  lumber  were  pledged  as  security  for  loans  of  $100,000. 

Prepare : 

a.  Adjusting  entries  for  above. 

b.  Corrected  Trial  Balances. 

c.  Consolidated  Balance  Sheet. 

d.  Write  a  brief   report  covering  the  examination  and  Balance  Sheet. 

41.     (From  New  York  C.  P.  A.  Examination,  January,  1913.) 

Company  C  was-incorporated  in  May,  1910,  to  acquire  the  stock  of  Companies  A  and  B.  Company 
C's  capital  stock  is  divided  into  preferred,  $2,500,000;  common,  $1,500,000;  all  the  stock  is  outstanding  and 
fully  paid;  it  has  been  issued  (1)  for  stock  to  the  stockholders  of  Companies  A  and  B,  (2)  $20,000  of  pre- 
ferred for  organization  expenses,  (3)  for  cash.  The  stockholders  of  A  and  B  received  preferred  stock  for 
the  intrinsic,  undepreciated  book  value  of  the  assets,  as  reflected  by  the  following  balance  sheets  of  their  com- 
panies at  June  30,  1910,  and  $300,000  of  common  stock  divisible  equally  between  Companies  A  and  B. 

32 


Assets 

Plant  Land $90,000  $195,000 

Building  and  Equipment 254,000  318,000 

Machinery  and  Tools 228,600  276,800 

Transportation  Equipment 21,000  17,000 

Investment  in  Land 150,000 

Investment  in  Bonds— Co.  B 60,000         

Investment— Stocks    200,000         

Goods  in  Process 45,000  49,341 

Finished  Goods 69,000  76,340 

Material  and  Supplies 58,000  51,300 

Cash 17,420  19,175 

Accounts  Receivable 51,000  92,800 

Demand  Notes— Co.  B 5,000         

Accrued  Interest 1,800         


$1,100,820  $1,245,756 
Liabilities 

Capital  Stock  Outstanding : 

Common  $700,000  $1,000,000 

Preferred   100,000         

6%  Bonds,  1915,  J.  &  J.  and  Interest  Accrued 92,700 

Accounts  Payable  59,800  41,656 

Loans  Payable 63,800  35,000 

Audited  Vouchers  Unpaid 18,320  13,400 

Demand  Notes  Payable 5,000 

Reserve  for  Depreciation 24,900  30,000 

Reserve  for  Doubtful  Accounts 5,000  2,000 

Reserve  for  Contingencies 18,000         

Surplus   111,000  26,000 


$1,100,820  $1,245,756 

Between  July  1  and  July  31,  1910,  the  following  transactions  occurred:  organization  expenses  paid  in 
cash  by  Company  C,  $5,000 ;  inter-company  advances  by  C :  to  A,  $60,000 ;  to  B,  $60,000 ;  Company  A  re- 
duced its  accounts  payable  by  $25,000 ;  its  loans  payable  by  $30,000  and  its  audited  vouchers  by  $15,000 ; 
Company  B  reduced  its  accounts  payable  by  $29,500,  liquidated  its  audited  vouchers  unpaid  and  its  interest 
due  under  the  bonds. 

iThe  manufacturing  operations  of  the  period  show :  Company  A — labor,  $10,000 ;  overhead  expenses, 
$8,000 ;  materials  consumed,  $9,886 ;  inventory  of  goods  in  process,  $46,300 ;  of  finished  goods,  $50,740 ; 
selling  expenses  paid,  $1,600;  administration  expenses,  $2,500;  sales,  $72,500;  collections  of  open  accounts, 
$86,400.  Company  B— labor,  $3,600  ;  overhead,  $2,350  ;  materials,  $5,210  ;  inventory  of  goods  in  process, 
$40,500;  of  finished  goods,  $46,380;  sales,  $98,000;  collections,  $109,150;  administration  expenses,  $3,000.75; 
selling  expenses,  $1,040. 

No  materials  were  purchased  during  the  period  and  the  current  expenses  were  paid  as  soon  as  the  in- 
voices were  audited.    Company  A  declared  a  dividend  of  $100,000  and  Company  B  a  dividend  of  $25,000. 

Prepare  the  consolidated  balance  sheet  of  Companies  A  and  B  and  C,  at  July  31,  1910,  to  be  submitted 
to  the  directors  of  Company  C  and  so  arranged  as  to  show  them  the  exact  detail  of  the  properties  that 
they  control. 

42.     (From  Massachusetts  1915  C.  P.  A.  Examination  in  Practical  Accounting.) 

Four  corporations  are  controlled  by  one  of  the  companies  through  stock  ownership.  They  operate  as 
separate  concerns,  buying  and  selling  to  each  other  and  to  outside  parties.  For  preparing  a  consolidated 
balance  sheet  and  profit  and  loss  account  the  following  is  required  for  each  company : 

a.  First  cost  of  product  sold. 

b.  Inter-company  profit  on  sales. 

c.  Stock  on  hand. 

33 


Prepare  statement  showing  above  from  the  following: 

The  combination  consists  of  companies  W,  X,  Y,  and  Z.  Company  W  purchases  raw  material  and 
sells  $20,000  to  outside  parties  and  $60,000  cost  price  to  Company  X  for  $60,000,  leaving  $20,000  on  hand. 
Company  X  spends  $34,000  in  manufacture  and  ships  over  Company  Y's  railroad  $70,000  to  Company  Z 
and  $20,000  to  outside  parties.  Company  Z  pays  Company  X  $77,000  for  the  goods  and  pays  Company 
Y  freight  $5,000  which  cost  the  latter  $3,500;  expends  $18,000  in  manufacturing  and  sells  $70,000  worth 
of  finished  product  to  outside  parties,  leaving  a  balance  on  hand. 

43.  (From  Massachusetts  1916  C.  P.  A.  Examination  in  Practical  Accounting.) 

Smith  and  Company  and  Jones  Company  being  pressed  by  their  bankers  and  obliged  to  pay  off  their 
loans,  agree  to  consolidate.    Their  liabilities,  capital  and  earnings  are  as  follows : 

Smith  Co.  Jones  Co. 

Common  Stock $200,000  $100,000 

Five  Per  Cent.  Bonds 100,000  Nil 

Six  Per  Cent.  Loans 25,000  50,000 

Surplus   30,000  Nil 

1 —    

$355,000  $150,000 

Together 505,000 

Earnings  available  for  interest  and  dividends 22,500  10,000 

Together , 32,500 

Smith  Company  issues  $100,000  additional  Common  Stock  and  $100,000  additional  Bonds  and  buy  up 
Jones  Company,  which  will  be  liquidated.  The  total  expenses  of  liquidation  and  issue  of  new  stock  and 
bonds  amount  to  $10,000,  and  the  cash  balance  will  be  increased  by  $15,000.  No  increased  profits  are  antici- 
pated from  the  consolidation  but  it  is  considered  that  the  earnings  of  $32,500  can  be  maintained.  Owing  to 
the  condition  of  Jones  Company  it  is  decided  that  its  stockholders  should  receive  $1,000  less  income  per 
annum. 

a.  How  much  of  the  $100,000  of  additional  capital  stock  of  Smith  Company  should  be  issued  to  the 
stockholders  of  Jones  Company,  and  how  much  is  available  for  stock  dividend  to  Smith  Company  Stock- 
holders ? 

b.  Show  the  entries  to  record  all  the  transactions  on  the  books  of  Smith  Company. 

44.  (From  Massachusetts  1916  C.  P.  A.  Examination  in  Practical  Accounting.) 

Prepare  a  consolidated  balance  sheet  of  "A  Company,"  a  manufacturing  corporation,  which  also  con- 
trols through  stock  ownership  "B  Company." 

The  following  are  trial^  balances  of  the  books  December  31,  1915 : 

.     .  A  COMPANY 

Dr.  Cr. 

Real  Estate .......      $200,000 

Machinery  and  Equipment 100,000 

Accounts  Receivable 50,000 

Cash 10,000 

Inventories  Dec.  31,  1915 75,000 

Shares  "B  Company"   300  shares  par  $100 35,000 

"B  Company"  current  account. 5,000 

Capital $400,000 

Accounts  Payable  30,000 

Bills  Payable   ;20,000 

Surplus   19,000 

Profit  and  Loss  for  1915 6,000 


$475,000      $475,000 
34 


B  COMPANY 

Dr.  Cr. 

Accounts  Receivable $45,000 

Stock  on  hand  Dec.  31,  1915 25,000 

Cash 5,000 

Treasury  Stock,  100  shares  cost 11,000 

Furniture  and  Fixtures 3,500 

Surplus  $20,000 

"A  Company"  current  account 4,500 

Accounts  payable 10,000 

"A  Company"  drafts  accepted /   5,000 

Capital  Stock  (500  shares  par  $100) 50,000 


$89,500       $89,500 

The  stock  on  hand  of  the  "B  Company"  was  manufactured  by  "A  Company"  and  billed  to  "B  Com- 
pany" at  10  per  cent,  in  excess  of  cost,  at  which  value  it  is  taken  in  the  inventory.  The  difference  in  the 
inter-company  current  accounts  consists  of  a  note  issued  by  "B  Company"  in  settlement  of  a  claim  for  dam- 
ages but  not  entered  on  the  books  and  was  paid  by  "A  Company."  The  "B  Company"  directors  declared 
a  dividend  of  ll/2  per  cent,  on  December  15,  1915,  payable  January  15,  1916,  which  has  not  been  entered  on 
the  books. 

45.     (From  Washington  C.  P.  A.  Examination,  September,  1914.) 

'The  following  are  Balance  Sheets  of  two  companies  at  December  31,  1913 : 

COMPANY  "A" 
Assets : 

Real  Estate,  Buildings,  Machinery  and  Equipment    $1,000,000.00 

Investments 320,000.00 

Inventories  240,000.00 

Accounts  Receivable  (Less  Reserve  of  $10,000.00)    510,000.00 

Cash 55,000.00 

Deferred  Charges  to  Operations 25,000.00 

$2,150,000.00 

Liabilities: 

Capital  Stock— Common  (par  $100.00) $750,000.00 

Capital  Stock— Preferred  (par  $100.00) 200,000.00 

Mortgage  on  Plant  Site 100,000.00 

Bills  Payable  200,000.00 

Accounts  Payable  400,000.00 

Surplus   500,000.00 

$2,150,000.00 

COMPANY  "B* 
Assets : 

Plant  and  Equipment $200,000.00 

Goodwill   200,000.00 

Inventories 100,000.00 

Accounts  Receivable 140,000.00 

Cash 20^000.00 

Deferred  Charges  to  Operations 10,000.00 

$670,000.00 
35 


Liabilities : 

Capital  Stock— Common  (par  $100.00) $200,000.00 

Capital  Stock— Preferred  (par  $100.00) 200,000.00 

Bills  Payable 20,000.00 

Accounts  Payable 120,000.00 

Surplus   130,000.00 


$670,000.00 


You  have  audited  the  accounts  of  the  two  compa  lies.  The  accounts  of  Company  "A"  are  found  in 
order  as  stated  above.    The  accounts  of  Company  "B"  are,  however,  subject  to  two  adjustments,  viz.: 

The  inventories  have  been  over-valued  $20,000.00  and  a  Reserve  for  Bad  and  Doubtful  Accounts  of 
$10,000.00  should,  in  your  opinion,  be  provided  for.     These  adjustments  you  are  to  make. 

Company  "A"  has  acquired  all  of  the  Preferred  Stock  of  Company  "B"  and  all  of  the  Common  stock, 
except  20  shares.  The  cost  of  the  Company  "B'  stock  to  Company  "A"  was  $300,000.00  and  the  same  is 
included  in  the  Investments  Account. 

No  consideration  was  received  by  Company  "B"  upon  the  issuance  of  its  Common  stock,  the  same 
having  been  given  away  as  a  bonus  in  connection  with  the  sale  of  the  Preferred  stock  at  par. 

Company  "B"  owes  Company  "A"  $20,000.00  on  current  account,  this  amount  being  included  in  the 
Accounts  Payable  and  Accounts  Receivable. 

Required — a  Consolidated  Balance  Sheet  setting  forth  the  combined  financial  condition  of  Company 
"A"  and  its  subsidiary  Company  "B." 

46.     (From  Wisconsin  C.  P.  A.  Examination,  May,  1916.) 

On  January  1,  1916,  a  corporation,  the  "C"  Company,  was  formed  with  a  capital  stock  of  $6,000,000, 
of  which  $5,000,000  was  common  stock  and  $1,000,000  was  preferred  stock.  The  "C"  company  as  of  Janu- 
ary 1,  1916,  purchased  the  capital  stocks  of  "A"  and  "B"  companies,  balance  sheets  of  which  at  December 
31,  1915,  are  shown  below.  The  preferred  stock  of  the  "C"  company  was  sold  to  the  public  for  cash  at 
par,  the  stockholders  of  the  "A"  company  received  the  entire  $5,000,000  of  the  common  stock  of  the  "C" 
company  for  their  holdings  in  the  "A"  company,  while  the  stockholders  of  the  "B"  company  were  paid 
$500,000  in  cash  for  their  holdings  in  the  "B"  company. 

Prepare  a  consolidated  balance  sheet  showing  the  financial  position  of  the  "C"  company  as  of  January 
1,  1916,  after  giving  effect  to  the  foregoing  transactions.  Your  working  papers  should  show  the  process 
by  which  you  arrive  at  the  final  balance  sheet  figures. 

It  should  also  be  understood  that  the  "A"  company  had  in  its  inventory  at  December  31,  1915,  ma- 
terials valued  at  $250,000,  purchased  from  the  "B"  company  on  which  the  "B"  company  had  made  a  gross 
profit  of  20  per  cent. 

"A"  COMPANY 

BALANCE  SHEET— DECEMBER  31,  1915 

Assets  Liabilities 

Real    estate,    buildings,    machinery    and  Capital  stock,  15,000  shares,  $100  each. .  $1,500,000 

equipment $1,000,000  Notes  payable— "B"  company 100,000 

Inventories   1,500,000  Others 400,000 

Accounts  receivable   500,000  Accounts  payable — "B"  company 100,000 

Cash 50,000  Others 700,000 

Prepaid  insurance  and  taxes 10,000  Surplus    260,000 


$3,060,000  $3,060,000 


36 


"B"  COMPANY 

I'.ALANCE  SHEET— DECEMBER  81,  1915 

Assets  Liabilities 

Real    estate,    buildings,    machinery    and  Capital  stock — 1,000  shares,  $100  each. .      $100,000 

equipment $250,000  Accounts  payable 140,000 

Inventories   75,000  Surplus 262,000 

Accounts  receivable — "A"  company....  100,000  Contingent  liability  in  respect  of  notes 

Others 50,000             of  "A"  company  discounted  at  banks, 

Cash 25,000                                                                 $100,000 

Prepaid  insurance  and  taxes 2,000 


$502,000  $502,000 

47.     (From  Massachusetts  C.  P.  A.  Examination,  June,  1913.) 

On  January  1,  1912,  the  Treasurer's  books  of  a  gas  company  show  the  following  figures:  Cash  on  hand, 

~>37;  Gas  Works,  $878,027;  Street  Mains,  $68,814;  Due  from  Assistant  Treasurer,  $184,387;  Notes 
Payable,  $100,000;  Dividends  Payable,  $12,000;  Capital  Stock,  $925,000;  Surplus,  $149,765.  The  Assist- 
ant Treasurer's  books  show:  Cash  on  hand,  $1,060;  Inventories,  $77,788;  Accounts  Receivable,  $44,504; 
Construction  in  Progress,  $58,980;  New  Mains,  $18,687;  Meters,  $29,332;  Expenses  Paid  in  Advance, 
$2,514;  Accounts  Payable,  $9,755;  Deposits  (by  customers,  to  secure  payment  of  bills),  $31,230;  General 
Expenses,  accrued  but  not  due,  $7,493 ;  due  the  Treasurer,  $184,387. 

From  January  1,  1912,  to  June  30,  1912,  the  Treasurer  receives  $35,500  cash  from  the  Assistant  Treas- 
urer, and  $58  interest  from  the  bank.  He  pays  $30,500  on  dividends ;  $26,000  on  notes  payable,  $3,400  for 
interest;  $5,000  for  salaries;  $11  for  general  expense;  $10,885  for  additions  to  gas  works. 

The  directors  declared  a  dividend  payable  June  30,  amounting  to  $18,500. 

The  Assistant  Treasurer's  books  for  the  same  period  show  sales  of  gas  amounting  to  $132,097.  The 
voucher  book  shows  a  credit  to  Accounts  Payable  of  $124,190,  charged  respectively  to  Construction  in  Prog- 
'-'l:  New  Street  Mains,  $7,712;  Meters,  $2,055;  Expenses  Paid  in  Advance,  $6,328;  Material, 
Labor,  $8,224;  Manufacturing  Expense,  $15,608;  Maintenance  Street  Mains,  $7,339;  Office  Ex- 
pense, $7,009;  General  Expense,  $26,714.  The  Assistant  Treasurer's  cash  book  shows  receipts  from  cus- 
tomers on  account  of  gas  sales,  $140,848 ;  from* customers  on  account  of  Deposits,  $911;  payments  on 
account  of  Accounts  Payable,  $105,509 ;  payments  to  the  Treasurer,  $35,500. 

The  Inventories  of  June  30  amounted  to  $75,347.  The  general  expense,  accrued  but  not  due  on  June 
30,  were  calculated  to  amount  to  $2,050.  The  expenses,  paid  in  advance  on  June  30,  were  calculated  to 
amount  to  $8,842. 

Transfer  the  operating  profit  or  loss  to  the  Treasurer's  books  and  give  a  consolidated  balance  sheet  of 
the  company  June  30,  1912,  which  shall  show  the  Treasurer's  books  and  the  Assistant  Treasurer's  books 
in  balance  with  each  other,  and  the  condition  of  the  company  as  a  single  entity  on  that  date. 


.V 


PART  IV 
BOND  ISSUES  AND  SINKING  FUNDS 

It  is  not  necessary  in  this  connection  to  discuss  the  numerous  types  of  bonds  which  enter  into  the 
financial  schemes  of  railroads  and  industrial  corporations,  to  consider  interest  rates  at  which  they  may 
be  issued,  or  the  relation  which,  under  given  conditions,  the  funded  debt  of  a  company  should  bear  to  its 
total  capitalization.  These  and  many  other  interesting  problems  connected  with  bond  issues  belong  to  the 
field  of  corporation  finance ;  further,  it  can  be  presumed  that  the  readers  of  these  notes  are  already  familiar 
with  the  general  principles  underlying  the  financial  policy  of  corporations  of  all  classes  as  regards  their 
funded  debt. 

From  an  accounting  standpoint,  however,  it  is  well  to  define  the  function  of  the  accounts  which  are 
associated  with  bond  issues  and  with  sinking  funds  established  for  their  redemption,  of  which  the  following 
are  the  most  common: 


BONDS 


Dr.: 

With   the   par   value   of   bonds    redeemed   or 
refunded. 


Cr. 


With  the  par  value  of  bonds  issued. 


The  balance  is  a  credit  and  represents  the  par  value  of  bonds  issued  and  outstanding.  Bonds  are  usually 
classed  as  a  fixed  liability,  or  under  the  head  of  Funded  Debt. 

The  title  given  to  the  account  is  usually  the  name  by  which  the  bonds  are  designated ;  as :  First  Mort- 
gage Bonds;  Six  Per  Cent.  Collateral  Trust  Bonds;  Debenture  Bonds. 

BOND  PREMIUM 


With  premium   realized  on  bonds   sold   above 


Dr. :  Cr. : 

The  bond  premium  should  be  amortized,  or 
written  off  over  the  term  for  which  the  bonds  were  par. 
issued.  As  the  premium  realized  on  the  sale  of  bonds 
is  regarded  as  reducing  the  nominal  rate  of  interest 
which  they  bear,  an  adjusting  entry  should  be  made 
at  each  closing  of  the  books  debiting  Bond  Premium 
and  crediting  Interest  on  Bonds  for  the  proportion 
of  bond  premium  applicable  to  the  period. 

The  balance  represents  the  unextinguished  portion  of  the  bond  premium  and  should  be  shown  in  the 
balance  sheet  among  the  liabilities  as  a  Deferred  Credit  to  Profit  and  Loss  or  as  a  special  reserve. 


BOND  DISCOUNT 


Dr. :  Cr. : 

With  discount  on  bonds  sold  below  par.  The  bond  discount  results  in  an  increase  in  the 

nominal  rate  of  bond  interest;  and  adjusting  entry 
should  therefore  be  made  at  the  time  of  closing  the 
books  debiting  interest  on  Bonds  and  crediting  Bond 
Discount  for  the  proportion  of  Bond  Discount  appli- 
cable to  the  period. 

The  balance  represents  the  unextinguished  portion  of  the  bond  discount  and  should  be  shown  as  a 
Deferred  Charge  to  Profit  and  Loss. 

Sinking  Funds  and  accounts  pertaining  thereto  have  to  do  with  the  provisions  made  by  a  company  paying 
off  a  funded  debt  at  maturity.  A  Sinking  Fund  in  a  strict  sense  relates  to  a  fund  created  by  withdrawing 
from  the  general  cash  each  year  such  an  amount  as,  together  with  interest  accumulations,  will  equal  the  debt 
at  maturity.  In  adopting  a  policy  of  making  provisions  for  the  future  redemption  of  bonds,  however,  the 
practice  of  corporations  as  reflected  in  the  accounting  records  is  not  at  all  uniform.  There  are,  in  fact, 
three  common  methods,  each  of  which  requires  a  different  treatment. 

38 


1.  In  accordance  with  the  strict  interpretation  of  such  a  policy,  a  certain  sum  of  money  would  be  set 
aside  periodically  or  paid  over  to  Sinking  Fund  trustees.  In  such  a  case  the  following  account  would  be 
opened  and  debited  and  credited  as  stated  below : 

.  BOND  SINKING  FUND 

Dr. :  Cr. : 

With  cash  instalments  set  aside  in  a   sinking  With  cash  payments  from  the  fund  to  retire  the 

fund  for  the  purpose  of  providing  the  actual  cash         bonds  for  which  the  fund  was  set  aside, 
needed  to  meet  an  issue  of  bonds  falling  due  at  a 
certain  time. 

With  income  derived  from  sinking  fund  invest- 
ments or  with  interest  received  on  sinking  fund  cash 
as  reported  by  the  sinking  fund  trustees;  such  in- 
come may  be  used  to  reduce  the  succeeding  instal- 
ment. The  corresponding  credit  would  be  to  an 
account  with  Income  from  Bond  Sinking  Fund. 
If  there  is  a  sinking  fund  reserve  account,  the  credit 
would  be  to  that  account. 

The  balance  is  an  asset  showing  the  amount  of  the  fund  at  any  time. 

2.  The  bond  indenture  may  not  obligate  the  company  to  set  aside  regular  cash  instalments  by  which 
a  sinking  fund  would  be  built  up ;  the  interest  of  the  bondholders  would  instead  be  safeguarded  by  the  crea- 
tion of  a  reserve  set  aside  out  of  profits  or  accumulated  surplus.  This  prevents  all  earnings  from  being 
used  for  dividends  and  results  in  increasing  the  margin  of  safety  as  shown  by  the  excess  of  assets  over 
liabilities ;  the  financial  position  of  the  company  is  thus  strengthened  and  the  company  would  be  in  a  posi- 
tion to  raise  the  money  to  retire  the  bonds  at  maturity  or  to  refund  the  issue  falling  due.  Under  such  condi- 
tions the  following  account  would  be  opened: 

RESERVE  FOR  BOND  SINKING  FUND 

Dr. :  Cr. : 

When  bonds  are  redeemed  at  maturity,  the  re-  Periodically  with  such  an  amount  reserved  from 

serve  created  while  the  bonds  were  outstanding  is  profits  as  will  create  a  reserve  sufficient  to  provide 
thrown  back  into  Surplus,  this  account  being  debited  for  the  redemption  of  the  bonds  at  maturity,  in  com- 
and  Surplus  credited.  pliance   with   the   "sinking    fund   indenture"   under 

which  such  bonds  are  issued. 

The  balance  is  a  credit  and  should  be  shown  on  the  liability  side  of  the  balance  sheet  under  the  sub- 
heading Reserves  or  under  Surplus. 

A  third  policy  regarding  sinking  funds  is  a  combination  of  the  other  two ;  that  is,  a  reserve  is  cre- 
ated out  of  profits  by  crediting  the  reserve  for  such  an  amount  each  year  as  will  make  adequate  provision  for 
the  redemption  of  the  bonds,  which  reserve  is  also  funded  by  setting  aside  at  the  same  time  an  equal  amount 
of  cash.  This  method  not  only  provides  the  cash  with  which  to  redeem  the  bonds  at  maturity,  but  at  the 
-.mie  time  conserves  the  earnings  to  a  like  extent.  If  no  reserve  is  set  aside  all  earnings  could  be  dis- 
sipated and  the  money  borrowed  if  need  be  to  meet  the  sinking    fund    instalments;   this   policy   if   continued 

Id  materially  weaken  the  financial  position  of  the  company  and  endanger  the  interests  of  the  stock- 
1  the  other  creditors. 

The  identure  under  which  the  bonds  are  issued  usually  provides  for  the  appointment  of  Sinking  Fund 
trustees,  who  become  responsible  for  the  care  and  investment  of  the  fund;  the  trustees  would  in  such  a 
case  keep  separate  accounts  to  record  all  transactions  having  to  do  with  the  receipt  of  the  cash  instalments, 
the  investment  of  the  same,  the  collection  of  the  income,  and  finally  the  liquidation  of  the  investments 

rhe  return  of  the  cash  to  the  company  to  be  used  in  paying  off  the  bonds. 

Following  is  an  explanation  of  the  function  of  the  accounts  which  would  usually  be  necessary : 


39 


J 


SINKING  FUND> 

Dr. :  Cr. : 

With  any  reduction  in  book  value  of  sinking  With  annual  instalments  paid  into  the  fund  by 

fund  investments.  the  company. 

With  loss  on  sale  of  sinking  fund  securities.  With   income   from   sinking   fund   investments 

added  to  the  fund. 

With  profit  realized  on  sale  of   sinking  fund 
securities. 

The  balance  is  a  credit  and  represents  the  amount  of  the  Sinking  Fund  for  which  the  Sinking  Fund 
Trustees  are  accountable  to  the  company. 

SINKING  FUND  CASH 

Dr. :  Cr. : 

With  cash  instalments  received  from  company  With  cost  of  investments  purchased, 

for  the  creation  of  the  sinking  fund. 

With  cash  restored  to  this  account  from  Sinking 
Fund  Income  Cash  account  in  lieu  of  accrued  in- 
terest paid  for  when  securities  were  purchased. 

With  balance  of  income  transferred  annually 
from  the  Income  Cash  account. 

With  amount  realized  from  the  sale  of  sinking 
fund  investments. 

The  balance  is  a  debit  and  represents  at  any  time  the  uninvested  portion  of  the  Sinking  Fund  Cash. 

SINKING  FUND  INVESTMENTS 

Dr. :  Cr. : 

With  cost  of  securities  purchased  by  Sinking  With  cost  of  securities  sold. 

Fund  Trustees.  With  any  reduction  in  book  value  of  securities. 

The  balance  is  a  debit  and  represents  the  cost  of  sinking  fund  securities  held  by  trustees. 

SINKING  FUND  INCOME 

Dr. :  Cr. : 

With  accrued  interest  on  sinking  fund  securi-  With  all  income  received  from  sinking  fund, 

ties  purchased.  With  accrued  interest  on  sinking  fund  securities 

sold. 

The  balance  is  a  credit  and  shows  the  net  income  realized  from  sinking  fund.  This  account  is  closed 
into  the  Sinking  Fund  account  annually,  thus  reducing  each  succeeding  instalment. 

SINKING  FUND  INCOME  CASH 

Dr. :  Cr. : 

With  income  received  in  cash  from  sinking  fund  With  cash  transferred  to  Sinking  Fund  Cash  to 

investments.  restore  to  that  account  the  cash  paid  out  of  prin- 

cipal in  lieu  of  accrued  interest  on  securities  pur- 
chased. 

The  balance  is  a  debit  representing  the  balance  of  income  cash  on  hand,  and  should  agree  with  the  credit 
of  Sinking  Fund  Income.    At  the  end  of  the  year  this  account  is  closed  into  Sinking  Fund  Cash  account. 

After  all  adjustments  have  been  made  the  sum  of  the  balances  to  the  debit  of  Sinking  Fund  Cash  and 
Sinking  Fund  Investments  should  equal  the  credit  to  the  Sinking  Fund  account. 

The  terms  of  the  sinking  fund  agreement  may  provide  for  the  purchase  by  the  trustee  of  the  company's 
own  bonds  either  in  the  open  market  or  by  the  drawing  of  certain  bonds  by  lot;  if  drawn  by  lot,  the  bonds 
are  usually  redeemed  at  a  small  premium  as  stated  in  the  bond  indenture.     The  interest  on  drawn  bonds 

40 


ceases  to  the  public  on  the  first  interest  date  following  the  drawing  of  the  bonds,  but  the  bonds  are  kept 
alive  and  the  interest  thereon  collected  by  the  trustee  throughout  the  life  of  the  bonds,  thus  becoming  part 
of  the  income  derived  from  sinking  fund  investments.  The  treatment  of  the  purchase  by  the  trustee  of  the 
company's  own  bonds  differs  in  no  sense  therefore  from  the  purchase  of  bonds  of  other  companies  as  far 
as  the  matter  of  accounting  is  concerned. 

Problems 

48.  (From  Massachusetts  C.  P.  A.  Examination,  June,  1913.) 

X,  Y,  Z,  Corporation  has  an  authorized  issue  of  $5,000,000  first  mortgage  5  per  cent,  bonds,  in  $1,000 
denominations;  $2,502,000  of  these  are  in  the  hands  of  the  public,  and  the  balance  in  escrow  in  the  hands  of 
trustees,  to  be  taken  down  only  to  take  up  the  bonds  of  underlying  companies,  or  for  new  construction  up  to 
80  per  cent,  of  the  expenditures ;  but  the  net  earnings  above  operating  expenses  and  taxes  for  the  previous 
year  must  equal  at  least  1^4  times  the  interest  on  all  outstanding  bonds,  including  those  to  be  taken  down. 
The  net  earnings  for  a  certain  year  were  $273,990.44.  There  were  also  in  the  hands  of  the  public  the  fol- 
lowing bonds  of  subsidiary  companies:  $106,000  5s,  and  $295,500  4x/2s.  The  expenditures  for  construction 
amounted  to  $300,000. 

State  how  many  bonds  can  be  taken  down  for  construction,  showing  how  you  arrive  at  the  result. 

49.  (From  Rhode  Island  C.  P.  A.  Examination,  December,  1907.) 

An  issue  of  $250,000  fifty  year  bonds,  dated  July  1,  1904,  is  redeemable  by  a  sinking  fund  into  which 
annual  cash  instalments  are  to  be  paid  by  deposit  of  funds  in  a  trust  company  which  allows  interest  at  the 
rate  of  2  per  cent,  per  annum,  credited  January  1  and  July  1.  Separate  books  are  to  be  kept  solely  for 
recording  and  sinking  fund  operations.  The  fund  so  created  is  to  be  invested  in  interest-bearing  securities, 
and  the  income  therefrom  is  to  be  applied  to  the  reduction  of  the  succeeding  annual  instalments. 

On  July  1,  1905,  the  first  instalment  of  $5,000  was  paid  into  the  fund,  and  on  the  same  day  the  follow- 
ing investments  therefor  were  made : 

Two  5  per  cent,  bonds  of  $1,000  each  April  1,  and  October  1,  at  par  and  accrued  interest. 

Two  6  per  cent,  bonds  of  $1,000  each,  May  1  and  Novemiber  1,  at  $110  and  accrued  interest. 

On  July  1,  1906,  the  second  instalment  was  duly  deposited  to  the  credit  of  the  fund,  and  on  the  same 
day  the  5  per  cent,  bonds,  purchased  in  the  previous  year  were  sold  at  101  and  accrued  interest  and  other 
investments  were  purchased  as  follows: 

(Two  6  per  cent,  bonds  of  the  same  issue  as  those  purchased  in  the  previous  year  at  105  and  accrued 
interest. 

Five  4  per  cent,  bonds  of  $1,000  each,  February  1  and  August  1,  at  98  and  accrued  interest. 

The  income  from  all  investments  was  regularly  received  and  deposited,  and  the  value  of  the  6  per  cent. 
bonds  purchased  in  1905  was  written  down  to  conform  to  the  value  of  the  bonds  of  the  same  issue  pur- 
chased in  1906  at  the  same  time  of  said  letter  purchase. 

Frame  journal  entries  and  write  up  the  sinking  fund  ledger  accounts  showing  the  amount  of  the  cash 
instalments,  payable  on  both  July  1,  1906,  and  July  1,  1907,  and  the  status  of  the  sinking  fund  at  said 
dates. 

50.  (From  New  York  C.  P.  A.  Examination,  June,  1908.) 

Highland  county  undertakes  two  public  improvements,  viz. :  a  road  estimated  to  cost  $50,000,  and  a 
sewer  estimated  to  cost  $40,000. 

The  work  is  to  be  paid  for  out  of  proceeds  of  county  bonds  falling  due  at  various  dates  and  redeem- 
able from  assessments  levied  against  property  presumably  benefited,  to  the  amount  of  the  actual  cost  of  the 
work  and  incidental  charges  when  these  are  determined. 

Bonds  to  the  above  amounts  are  accordingly  sold,  realizing  a  premium  of  1  per  cent.,  which  is  added 
to  the  respective  funds;  the  cost  of  the  two  undertakings  when  completed  is  $50,000  and  $40,500  respec- 
tively, for  which  assessments  are  accordingly  levied. 

Assessments  are  subsequently  collected  as  follows:  for  roads  $30,200,  with  accrued  interest  of  $1,310  ; 
for  sewers  $29,400,  with  accrued  interest  of  $1,250.     The  interest  in  each  case  goes  into  the  related  funds. 

Road  bonds  of  the  par  value  of  $20,000  and  sewer  bonds  of  the  par  value  of  $15,000  mature  and  are 
redeemed. 

Frame  journal  entries,  post  to  ledger  accounts  and  prepare  a  trial  balance  from  which  the  status  of  the 
county  debt  and  of  the  funds  and  assessments  at  the  conclusion  of  the  above  transactions  can  be  ascer- 
tained and  determined. 

41 


NOTES  OF  FOREGOING  PROBLEM 

Treatment  of  Assessment  Accounts 

(From  pages  58-60  of  the  "Handbook  of  Municipal  Accounting,"  edited  by  the  Bureau  of  Municipal  Re- 
search and  published  by  D.  Appleton  and  Company.) 

In  considering  the  above  problem,  substitute  the  work  "county"  for  "city." 

Accounts  relating  to  improvements  which  are  assessable  against  property  deemed  benefited  are  included 
among  the  capital  accounts  because  these  improvements  belong  to  the  city  and  increase  the  capital  surplus. 

Stated  in  general  terms,  the  theory  of  assessment  accounts  is  that  the  city  lays  out  money  for  improve- 
ments benefiting  particular  sections  of  the  city  and  then  levies  assessments  against  the  property  benefited  to 
recover  the  money  so  spent.  In  some  cities  the  property  owner  deals  with  the  contractor,  the  city  merely 
acting  as  agent.     In  such  cases,  however,  the  improvement  usually  belongs  to  the  city  when  completed. 

Probably  the  most  used  method  of  financing  these  expenditures  is  to  issue  bonds,  sometimes  called 
assessment  bonds.  Outlays  for  the  improvements  are  charged  to  a  local  improvements  in  progress  account 
and  when  the  improvement  is  completed,  assessments  receivable,  representing  accounts  against  individual 
owners  of  property  benefited,  is  charged  and  the  former  account  credited ;  at  the  same  time  an  account  with 
permanent  improvements  is  charged  and  capital  surp'us  is  credited.  Such  an  arrangement  enables  the  city 
to  carry  on  a  large  or  small  improvement  as  may  be  required. 

I-n  the  case  of  improvements  paid  for  out  of  bond  funds  care  must  be  exercised  to  see  that  money 
recovered  from  property  owners  by  the  collection  of  assessments  is  applied  to  retire  the  bonds  sold  for  the 
purpose  or  returned  to  the  source  from  which  it  was  obtained.  This  may  be  done  by  crediting  collections, 
exclusive  of  interest  and  penalties,  to  reserve  for  retirement  of  assessment  bonds  and  debiting  unapplied 
(not  cash)  balance  in  the  fund  balance  sheet  (Exhibit  8).  The  money  provided  by  the  city  to  meet  any 
deficiency  in  assessments  or  to  pay  assessments  on  city-owned  property  must  also  be  credited  to  this  re- 
serve. When  all  assessments  have  been  collected  there  will  be  just  enough  money  represented  by  this 
reserve  to  pay  off  the  bonds  originally  sold  to  raise  funds  for  the  assessable  improvements.  This  illus- 
trates another  phase  of  the  utility  of  the  fund  accounts  and  the  fund  balance  sheet. 

51.  .  (From  New  York  C.  P.  A.  Examination,  February,  1910.) 

The  Virginia  Coal  Co.  was  originated  on  January  1,  1906,  began  operations  about  January  7,  1906, 
and  kept  an  ordinary  set  of  books  (by  double  entry )  but  did  not  close  their  accounts  at  the  end  of  any  fiscal 
year. 

After  an  examination  and  verification  of  all  accounts  stated  in  the  trial  balance  they  are  accepted  as 
correct,  except  that  termed  "Sinking  Fund  Payments"   ($22,500). 

The  mortgage  securing  bonds  to  the  amount  of  $200,000  contains  a  sinking  fund  clause  providing  that 
the  company  shall  deposit  semi-annually  with  the  Sinking  Fund  Trustee  5c.  per'  ton  on  all  coal  mined ;  such 
payments  shall  be  made  to  trustees  during  January  and  July  of  each  year  for  the  preceding  six  months' 
period.  Money  so  deposited  is  to  be  applied,  as  soon  as  practicable,  to  purchase  bonds  at  not  exceeding  115 
and  accrued  interest ;  compensation  and  expenses  of  trustee  are  also  to  be  paid  from  the  Sinking  Fund. 
Bonds,  when  redeemed,  can  not  be  canceled  but  are  to  be  held  by  trustee,  who  shall  collect  the  semi-annual 
interest  thereon,  and  apply  to  the  same  purpose  as  the  5c.  per  ton  payments. 

•  Bonds  are  dated  January  1,  1906,  run  for  20  years  and  bear  interest  at  6  per  cent,  per  annum,  payable 
January  1  and  July  1  of  each  year. 

Payments  to  Sinking  Fund  Trustees   (the  General  Trust  Co.)  have  been  as  follows: 

July  27,  1906— Payment  for  6  mo.  ended  6/30/06,  5c  per  ton  on  120,000  tons. $6,000 

Jan.  24;  1907— Payment  for  6  mo.  ended  12/31/06,  5c  per  ton  on  150,000  tons. 7,500 

July  £8,  1907— Payment  for  6  mo.  ended  6/30/07,  5c  per  ton  on  180,000  tons 9,000 

$22,500 

On  January  30,  1908,  the  Company  paid  to  the  General  Trust  Co.  (S.  F.  Trustee)  $5,500  for  Sinking 
Fund  payment  for  the  6  mo.  ended  December  31,  1907,  being  5c  per  ton  on  110,000  tons. 

The  General  Trust  Co.  submitted  statements  of  receipts  and  disbursements  for  account  of  the  Sinking 
Fund  to  date  (January  31,  1908)  as  follows:  '" 

42 


CASH  RECEIVED  TO  DECEMBER  31,  1907 

July  27,  1906— S.  F.  deposit  for  6  mo.  ended  June  30,  1906,  120,000  tons  at  5c $6,000 

Jan.     5,  1907 — Jan.,  1907,  coupons  on  5  bonds 150 

Jan.  24,  1907— S.  F.  deposit  for  6  mo.  ended  Dec.  31,  1906,  150,000  tons  at  5c 7,500 

July    3,  1907— July,  1907,  coupons  on  12  bonds 360 

July  28,  1907— S.  F.  deposit  for  6  mo.  ended  June  30,  1907,  180,000  tons  at  5c 9,000 

V 

$23,010 
CASH  DISBURSEMENTS  TO  DECEMBER,  31,  1907 

Aug.  16,  1906— Bonds  redeemed— 5,000  at  110 $5,500.00 

Commission  at  J4  % 12.50 

Accrued  interest 37.50 

Feb.   15,  1907— Bonds  redeemed—  $5,550.00 

4,000  at  108 ' $4,320 

2,000  at  110 . .  2,200 

1,000  at  112 1,120 

$7,640.00 

Commission 17.50 

Accrued  interest 52.50 

$7,710.00 

Aug.  12,  1907 — Bonds  redeemed — 

9,000  at  90 | $8,100 

1,000  at  par 1,000 

$9,100.00 

Commission 250.00 

Accrued  interest 70.00 

9,420.00 

Dec.   31,  1907— Compensation  of  trustee $100.00 

Advertising  50.00 

150.00 


$22,830.00 
Cash  balance  in  hands  of  trustees  Dec.  31,  1907 $180.00 

Received  in  January,  1908,  viz. : 

S.  F.  deposit  for  6  mb.  ended  Dec.  31,  1907,  110,000  tons  at  5c $5,500.00 

Jan.,  1908,  Coupons  on  22  bonds  in  S.  F 660.00 

Interest  allowed  on  balance  to  12/31/08 100.00 

6,260.00 


$6,440.00 

Prepare  entries  to  state  properly  on  the  books  of  the  Virginia  Coal  Co.  all  Sinking  Fund  transactions. 

52.     (From  Illinois  C.   P.  A.  Examination,  May,  1914.) 

The  A.  B.  C.  Estate  Company  was  formed  on  January  1,  1912,  and  the  following  is  the  trial  balance  as 
at  December  31,  1913,  before  closing  the  income  and  expenditure  accounts  for  current  year: 


43 


THE  A.  B.  C.  ESTATE  COMPANY 
TRIAL  BALANCE— DECEMBER  31,  1913 

Dr.  Cr. 

Capital  stock  authorized  and  issued $140,000.00 

Bonds  issued: 

120,000  20-year  5%  bonds  issued  January  1,  1912  at  a  discount  of  5% 120,000.00 

Discount  on  bonds  issued $6,000.00 

Property  (Jan.  1,  1913) .250,280.50 

Capital  stock  in  treasury 12,000.00 

Calls   unpaid    500.00 

Additions  to  property  1913  : 

Sinking  artesian  well 5,000.00 

A.  B.  C.  Estate  Co. : 

Bonds  purchased  1912   (and  canceled) $6,000.00  5,850.00 

Bonds  purchased  1913 6,000.00  5,750.00 

Rents  collected .  24,500.00 

Fire  insurance  paid  for  year  ending  June  30,  1914 300.00 

Agents'  fees  and  expenses 2,850.00 

General  office  expenses 1,050.00 

Cash  at  bankers  and  on  hand 1,389.50 

Secretary's  salary  and  commission". 2,380.00 

Income  and  expenditure  account  1912 14,250.00 

Interest  on  bonds  (paid  annually) 5,400.00 


$29)8,750.00  $298,750.00 

The  rent  collections  include  rents  paid  in  advance,  $750.00,  and  there  are  sundry  rents  outstanding 
not  taken  up  on  the  books,  amounting  to  $2,650,00,  of  which  it  is  estimated  $15.00  will  not  be  collected. 

No  provision  has  been  made  in  the  year's  accounts  for  depreciation  of  the  buildings,  included  in  the 
property  account,  the  original  cost  of  which  was  $120,000.00.  In  the  year  1912  the  amount  written  off  was 
based  on  an  estimated  life  of  20  years. 

Prepare  balance  sheet  as  at  December  31,  1913,  and  income  and  expenditure  account  for  the  year 
'  ended  that  date,  after  making  the  necessary  adjustments. 

53.     (From  Ohio  C.  P.  A.  Examination,  November,  1914.) 

A  syndicate  organized  for  the  purpose  of  financing  the  construction  of  a  railroad,  advised  the  sub- 
scribers that  upon  the  further  payment  of  $340  per  each  $1,000  originally  subscribed  and  theretofore  paid 
in,  it  would  be  able  to  retire  the  railroad  company's  note  for  $400,000.00,  release  the  railroad  company's 
bonds  which  had  been  pledged  as  collateral  security  thereto,  and  distribute  to  the  subscribers,  in  liquidation 
df-  the  syndicate,  $680.00  par  of  bonds  (being  the  entire  bond  issue)  and  $780.00  par  of  stock  of  the  rail- 
road company  for  each  $1,000.00  originally  subscribed,  and  that  the  balance  of  the  railroad  company's 
stock  had  been  used,  at  par,  to  pay  for  right  of  way,  construction  and  equipment  (including  organization 
and  other  preliminary  expenses)  and  to  provide  working  capital  (in  cash)  amounting  to  $50,000.00;  also 
that  the  real  estate  owned  by  the  railroad  company  was  valued  at  an  amount  equal  to  its  bonded  indebt- 
edness, which  latter  bore  the  relation  of  four  to  five  of  its  issued  stock.  All  original  subscriptions  and  the 
above  mentioned  additional  call  have  been  paid  in,  the  railroad  company's  note  paid  off  and  the  syndicate 
liquidated. 

(No  attention  need  be  paid  to  factors  not  mentioned  in  the  problem,  and  the  use  of  cents  may  be 
avoided  by  using  amounts  rounded  off  at  the  nearest  dollar.) 

a.  Prepare  a  balance  sheet  of  the  railroad  company. 

b.  Prepare  summary  opening,  running  and  closing  entries  on  the  syndicate's  journal,- cash  book  and 
ledger. 

c.  Attach  your  working  papers  showing  the  calculations  made  in  solving  the  problem. 

44 


54.  (From  Pennsylvania  C.  P.  A.  Examination,  November,  1912.) 

A  company  issues  $1,000.00  bonds  (denominatioi  $1,000.00  each),  dated  January  1,  1910,  bearing  in- 
terest at  5  per  cent,  and  maturing  January  1,  1920.  These  bonds  were  sold  at  80  per  cent,  of  their  par 
value. 

The  mortgage  provides  for  a  sinking  fund  to  ba  created  by  annual  payments  of  $50,000.00,  and  at 
December  31,  1911,  the  balance  sheet  of  the  company,  among  other  items,  shows  the  following,  which  relate 
to  these  transactions: 

Discount  on  bonds debit,       $160,000.00 

Trustee  of  sinking  fund debit,         102,000.00 

First  mortgage  bonds credit,     1,000,000.00 

On  January  1,  1912,  the  trustee  purchased  113  b  mds  out  of  the  funds  in  his  possession  at  $900.00 
each,  which  were  canceled. 

State  what  entries  should  be  made  in  respect  to  these  transactions ;  also  give  your  views  as  to  the  proper 
treatment  of  discount  on  bonds,  both  as  to  when  they  are  purchased  and  canceled,  as  in  the  foregoing, 
and  when  they  are  not  redeemed  until  maturity. 

55.  By  the  terms  of  a  sinking  fund  agreement  the  trustee  collects  from  the  Railway  Company,  semi- 
annually, on  the  1st  day  of  January  and  July,  the  interest  on  the  bonds  in  the  sinking  fund,  together  with 
the  sinking  fund  payment. 

If  it  cannot  purchase  sufficient  bonds  at  par  and  accrued  interest  in  the  open  market  to  absorb  the  moneys 
in  the  sinking  fund  it  draws  sufficient  bonds  by  lot,  ten  days  prior  to  February  1st  and  August  1st  of 
each  year  at  par  flat  so  as  to  invest  all  of  the  moneys  i  i  its  hands. 

The  interest  on  these  drawn  bonds  ceases  to  the  public  on  the  first  coupon  date  after  they  are  drawn. 

The  bonds  are  held  alive  in  the  sinking  fund  and  interest  on  the  same  is  collected  by  the  trustee  and 
is  used  with  the  semi-annual  sinking  fund*  payments  to  retire  additional  bonds. 

The  first  statement  of  account  is  that  rendered  by  the  trustee  to  the  assistant  treasurer  of  the  Railway 
Company,  who  checks  it  up  and  renders  the  second  statement  of  account  to  the  treasurer  of  the  Railway 
Company  to  be  taken  into  the  accounts. 

Reconcile  the  two  statements  of  account. 

1 
Susquehanna  Railway  Company 
In  Account  With 

The  Southwestern  Trust  Company,  Trustee,  under  Sinking  Fund  Agreement  dated  January   1, 
1880,  for  Northern  Division  4%  Bonds  maturing  1930#. 

tSlfi  DR. 

Jan.    15     Bought  $10,000  No.  Div.  4%  Bonds  at  99l/2 $9,950.00 

rued  Interest 182.22 

$10,132.22 

Jan.  2(5  Paid  $1 00  drawn  bond  and  coupon 1 02.00 

1      $95, 100  drawn  bonds  and  coupons 95,202.00 

'•   $10,000  drawn  bonds 10,000.00 

I'd).  \              $2,200  drawn  bonds  and  coupons .  2,202.00 

•   Balance  i2,796.06 

$130,434.28 


4S 


1914  CR. 

Dec.  31     Balance  as  per  account  rendered $3,540.28 

1915 

Jan.     1     Received  semi-annual  payment  to  the  sinking  fund 40,000.00 

Jan.     1     Collected  six  months  interest  to  February  1,  1915,  on  $4,329,500  Northern  Division 

4%  Bonds 86,590.00 

Jan.  27     Collected  coupon  paid  with  drawn  bond '. 2.00 

Feb.  1  Collected  six  months  interest  to  date  on  $10,000  Northern  Division  4%  Bonds  pur- 
chased in  January 200.00 

Feb.    3     Collected  coupons  paid  with  drawn  bonds 102.00 


$130,434.28 
Feb.    5     Balance $12,796.06 

DRAWN  BONDS  NOT  YET  PRESENTED  FOR  PAYMENT : 

No.  286  for  $1,000  and  Nos.  016,  0288,  0354  for  $100  each,  on  which  interest  ceased  February  1,  1914. 
Nos.  259,  456  for  $1,000  each  and  No.  07  for  $100,  on  which  interest  ceased  August  1,  1914. 
Nos.  38,  96,  102,  157,  966,  988,  1655,  4299,  4300  for  $1,000  each,  and  Nos.  015,  019,  026,  0100  for 
$100  each,  on  which  interest  ceased  February  1,  1915. 

2 

The  Southwestern  Trust  Company,  Trustee,  under  Sinking  Fund  Agreement  dated  January  1,  1880, 
for  Northern  Division  4%  Bonds  maturing  1930. 

In  Account  With 
Susquehanna  Railway  Company 

1914  DR.  , 

Dec.  31.     Balance  as  per  account  rendered $66.28 

1915 

Jan.     1     Paid  semi-annual  payment  to  sinking  fund ' 40,000.00 

Jan.     1  Six  months  interest  to  Feb.  1,  1915,  on  $4,332,900  Northern  Division  4%  Bonds. . .  86,658.00 

Feb.    1     Paid  six  months  interest  to  date  on  bonds  purchased  in  January 200.00 

$126,924.28 

Feb.    5     Balance $92.06 

1915  CR. 

Jan.  15     Bought  $10,000  No.  Div.  4%  Bonds  at  99^ $9,950.00 

Accrued  Interest   182.22 

. $10,132.22 

Feb.    1     $116,700  Northern  Division  Bonds  drawn  for  payment  this  day  at  par 116,700.00 

Feb.    5     Balance  92.06 


$126,924.28 
SINKING  FUND  BONDS 

$4,459,600  Northern  Division  4%  Bonds 

56.     (From  New  York  C.  P.  A.  Examination  January,  1906.) 

A  corporation  issues  $100,000  in  20-year  bonds,  dated  January  1,  1902,  redeemable  out  of  revenue  by 
means  of  20  annual  sinking  fund  instalments  of  $5,000  each.  December  31,  1902,  $5,000  is  reserved  out  of 
profits  and  placed  to  the  credit  of  Reserve  for  Redemption  and  $5,000  is  deposited  in '  a  trust  company  at 
2%  and  charged  to  Sinking  Fund  for  Redemption.  Separate  sinking  fund  books  are  opened  in  the  ledger 
in  which  Cash  is  charged  and  Sinking  Fund  credited  with  said  first  instalment. 

February  2,  1903,  investments  are  purchased  for  the  sinking  fund  and  the  principal  thereof  is  charged 
on  the  sinking  fund  books  to  separate  investment  accounts,  while  the  accrued  interest  is  charged  to  Revenue 
from  Investments. 

46 


The  investments  so  purchased  are  as  follows: 

a.  Two  (2)  5%  gold  bonds,  due  1950,  at  $1,000  each,  interest  payable  May  1,  Nov.  2,  at  par  and 
accrued  interest. 

b.  One  (1)6%  gold  bond,  due  1940,  of  $1,000,  April  1,  Oct.  1,  at  120  and  accrued  interest. 

c.  The  company  loans  on  first  mortgage  $1,400  at  5%  interest,  payable  Aug.  1,  Feb.  1. 

The  interest  is  regularly  received  and  deposited  in  the  special  account,  charged  to  Cash  and  credited 
to  Revenue  from  Investments,  which  latter  account  is  in  turn  closed  by  transfer  of  balance  to  Sinking. 
Fund  for  Redemption. 

December  31,  1903,  the  second  annual  reserve  is  made  in  the  amount  of  $5,000,  less  the  net  income  of 
the  sinking  fund  for  the  expired  current  year  as  shown  by  the  sinking  fund  books,  and  a  corresponding 
deposit  is  made  in  the  special  fund,  while  the  proper  entries  of  the  receipt  thereof  are  also  made  and  posted 
in  the  sinking  fund  books.  March  1,  1904,  two  (2)  6%  bonds  of  the  same  issue  as  purchased  in  the 
previous  year  are  bought  for  the  sinking  fund  at  116  and  accrued  interest,  and  one  (1)  of  the  5%  bonds 

>ld  at  103  and  accrued  interest,  and  a  first  mortgige  for  $3,500  at  5%  March  1  and  Sept.  1  is  pur- 
chased. The  6%  bond  bought  in  1903  and  held  at  120  is  written  down  to  116,  and  the  remaining  5% 
bond  held  at  par  is  written  up  to  103  by  cross  entry  between  the  principal  account  and  the  Revenue  from 
Investments  account. 

December  31,  1904,  the  third  instalment  is  reserved  and  deposited  in  the  same  manner  and  on  the  same 
principle  as  the  preceding  ones. 

Frame  the  necessary  journal  entries  on  both  the  general  and  the  sinking  fund  book  to  give  expression 
to  the  foregoing  transactions ;  also  the  accounts  affected  in  both  ledgers  showing  the  status  of  sinking  fund 
at  the  beginning  of  1905. 

57.  (From  Massachusetts  C.  P.  A.  Examination,  October,  1916.) 
Prepare  a  balance  sheet  at  June  30,  1916,  from  the  following  data: 

The  X.  Y.  Z.  Company  was  incorporated  January  1,  1914,  with  5,000  shares  of  stock  having  no  par 
value,  $200,000  was  paid  into  the  company  for  which  3,000  shares  of  stock  were  issued,  2,000  shares  and 
$50,000  were  given  for  water-power  rights  and  land  valued  at  $150,000,  and  $100,000  was  expended  in 
constructing  and  equipping  an  electric  power  plant  which  started  operation  July  1,  1914.  Organization 
expenses  were  $2,000.     Salaries  and  office  expenses  up  to  July  1,  1914,  were  $10,000. 

After  operating  a  few  months  it  was  decided  to  build  an  additional  power  plant,  to  finance  which 
',000  par  value  1st  mortgage  5%  20-year  bonds   (interest  semi-annually)  were  issued  in  denominations 
of  $500  and  $1,000  and  sold  at  98  on  January  1,  1915.     The   construction  expenditures   for  the  new   plant 
were  $175,000  and  it  was  completed  and  put  into  operation  July  1,  1915. 

The  mortgage  deed  of  trust  provides  that  a  sinking  fund  of*  $5,000  be  set  aside  on  December  31st  of 
each  year  out  of  profits  for  the  first  ten  years  and  $15,000  per  year  thereafter  with  which  to  retire  bonds 
at  101  each  year.  The  two  power  plants  have  been  depreciated  at  the  rate  of  5%  per  annum  on  the  cost, 
starting  from  the  date  when  operations  commenced.  The  gross  earnings  from  July  1,  1914,  to  June  30, 
l!tl»>,  were  $85,000,  of  which  $45,000  was  collected,  and  the  operating  costs  paid,  exclusive  of  deprecia- 
tion, were  $40,000. 

58.  (From  Massachusetts  C.  P.  A.  Examination,  October,  1916.) 

A  corporation  authorized  a  total  issue  of  $500,0  )0  of  5%  bonds  in  denomination  of  $1,000  and  $500 
with  interest  payable  January  1st  each  year,  and  sold  the  whole  issue  to  underwriters  January  1,  1914,  at 

The  company  issued  the  bonds  for  the  underwriters  at  95  and  received  the  cash  in  payment  February 
1.  1914. 

The  trust  deed  provides  that  "there  shall  be  established  a  fund  to  be  called  The  Bond  Sinking  Fund,  to 
the  account  of  which  there  shall  on  the  31st  day  of  December  of  each  year  be  carried  a  sum  equal  to 
seven  per  cent,  of  the  total  par  value  of  the  Bonds  issued,  and  that,  out  of  the  moneys  so  carried  to  the 
account  of  the  said  fund,  the  company  shall  pay  the  interest  on  the  bonds  as  the  same  become  due,  and 
the  balance  of  said  moneys  shall  be  expended  each  year  in  purchasing  the  bonds  of  the  company  in  the 
open  market  ' 

In  January,  1915,  the  company  purchased  $10,000  of  its  bonds  at  !»7  and  retired  and  canceled  them. 
In  January,  1916,  the  market  price  of  the  bonds  is  98. 

a.  How  many  bonds  may  be  purchased  from  the  Bond  Sinking  Fund  in  January,  191(1? 

b.  Make  journal  entries  for  all  the  transactions  from  the  date  of  the  sale  of  the  bonds  to  and  including 
the  purchase  for  the  Sinking  Fund  in  January,   1910. 

c.  Show  trial  balance  after  posting  above  entries. 

47 


PART  V 
RECEIVERSHIPS  AND  BANKRUPTCY 

In  actual  practice,  the  accounting  problems  which  arise  in  connection  with  receiverships  and  bankruptcy 
introduce  no  principles  that  are  essentially  new.  Unless  there  are  complications  due  to  the  manner  in  which 
the  accounts  have  been  kept  prior  to  the  receivership  or  bankruptcy,  or  unless  fraud  is  suspected,  account- 
ants are  seldom  consulted  in  such  cases.  The  accounting  Work  connected  with  winding  up  the  affairs  of 
the  business  will  usually  be  attended  to  in  the  office  of  the  receiver,  who  is  generally  a  lawyer,  or  of  the 
referee  in  bankruptcy.  In  bankruptcy  a  balance  sheet  would  be  submitted  to  the  referee  prepared  from 
the  books  of  the  company.  The  assets  are  then  appraised  and  the  creditors  are  required  to  prove  their 
claims.  Subsequent  thereto  the  accounting  work  consists  simply  of  recording  the  conversion  of  the  assets 
into  cash  and  the  liquidation  of  the  claims  of  the  creditors. 

The  matter  is  not  quite  so  simple  in  the  case  of  a  receivership,  as  it  then  usually  becomes  necessary 
for  the  receiver  to  assume  complete  control  of  the  company  and  in  such  capacity  he  is  responsible  for  the 
administration  of  all  its  affairs.  The  object  of  a  receivership  is  to  avert  bankruptcy  if  possible.  A  company 
finds  itself  financially  embarrassed  but  has  reason  to  feel  that  the  difficulty  is  only  temporary  or  is  due  to 
the  inefficiency  of  its  present  management.  The  company  in  such  cases  may  ask  for  a  friendly  receiver  or 
creditors  may  force  a  receivership  in  order  that  the  management  may  be  placed  in  other  hands  in  the  hope 
that  the  business  may  be  helped  out  of  its  difficulty  and  placed  on  a  sound  financial  basis.  In  such  cases,  there 
would  usually  be  no  outward  change  apparent.  The  business  would  be  continued  in  the  same  manner  and 
the  accounting  system  would  undergo  no  change,  unless  it  be  deemed  advisable  to  close  out  the  old  books 
and  transfer  the  accounts  to  a  new  set  of  books  to  be  kept  during  the  receivership. 

While  the  actual  accounting  involved  in  such  cases  presents  no  particular  difficulties,  as  we  have  seen, 
there  has  been  forced  upon  students  of  accounting  certain  highly  technical  financial  statements  purporting 
to  be  associated  with  the  accounts  of  receivership  and  bankruptcy.  These  are  known  as  a  Statement  of 
Affairs,  Deficiency  Statement  and  a  Realization  and  Liquidation  Account.  Boards  of  Examiners  for  Cer- 
tified Public  Accountants  in  the  various  states  have  probably  set  more  practical  problems  requiring  the 
preparation  of  one  or  more  of  these  statements  than  they  have  on  any  other  one  phase  of  accounting.  Such 
problems  may  be  as  good  as  any  others  as  a  test  of  the  reasoning  powers  of  a  candidate  but  as  no  practical 
reason  exists  in  this  country  for  such  problems  they  may  be  regarded  as  essentially  impractical  and  there- 
fore of  little  importance.  It  can  only  be  assumed  that  the  reason  for  the  popularity  of  such  problems 
among  examining  boards  is  that  they  serve  as  a  never- failing  stumbling  block  to  candidates. 

The  problems  are  distinctly  English  in  their  character  and  the  technical  statements  required  are  copied 
after  those  used  by  English  and  Scotch  accountants.  From  an  academic  standpoint,  however,  it  can  be 
said  in  favor  of  the  problems  that  they  are  usually  interesting  and  require  clear  analysis  and  intelligent 
work  on  the  part  of  the  student,  and  so  long  as  boards  of  examiners  make  use  of  them  it  is  hardly  wise  to 
ignore  them  in  a  course  dealing  with  practical  accounting  problems. 

Statement  of  Affairs 

As  noted  above,  this  statement  originated  in  England  where  it  is  necessary  within  a  certain  number  of 
days  "following  the  appointment  of  an  Official  Receiver  for  the  debtor  to  lodge  with  the  Receiver  a  State- 
ment of  Affairs."  This  must  be  prepared  on  an  official  form,  as  in  the  case  of  our  own  executors'  or 
trustees'  accounts,  for  example. 

The  statement  is  an  estimate  of  the  amount  which  the  assets  of  the  business  will  yield  as  a  result  of 
enforced  liquidation.  Such  a  statement  does  not  of  course  arrive  at  any  final  conclusions  but  gives  a 
more  or  less  definite  basis  of  action.  In  form,  it  closely  resembles  a  balance  sheet  with  an  additional  column 
running  parallel  with  the  asset  items  headed  "Expected  to  Realize,"  and  another  column  parallel  with  the 
liabilities  headed  "Expected  to  Rank." 

The  asset  side  of  the  statement  shows  the  assets  in  the  anticipated  order  of  their  realization. 

The  liability  side  shows  the  liabilities  usually  classified  as  follows : 

1.  Unsecured  claims. 

2.  Partly  secured  claims. 

3.  Fully  secured  claims. 

4.  Preferred  claims. 

48 


"Preferred  Claims"  relates  to  those  claims  for  debts  and  expenses  which  must  be  paid  in  advance  of  the 
claims  of  regular  creditors.    They  consist  of  the  following: 

1.  Taxes  legally  due  and  owing  to  the  United  States,  state,  county  or  municipality. 

2.  Expenses  incurred  in  the  proper  administration  of  the  estate,  including  reasonable  fees  of  attorney 
and  receiver. 

3.  Wages  due  for  services  performed  within  three  months  of  the  filing  of  the  petition,  but  not  to 
exceed  $300  in  the  case  of  a  single  employee. 

4.  Filing  fees  paid  by  creditors  in  involuntary  bankruptcy. 

The  following  points  should  be  observed  in  preparation  of  the  statement: 

1.  Fully  secured  claims  should  be  deducted  from  the  assets  given  as  security. 

2.  Pledged  assets  should  be  deducted  from  partly  secured  claims. 

3.  The  preferred  claims  should  be  deducted  from  the  remainder  of  the  appraised  value  of  the  assets 
as  shown  by  the  "Estimated  to  Realize"  column. 

4.  The  balance  shown  by  the  difference  between  the  totals  of  the  "Expected  to  Rank"  and  the  "Ex- 
pected to  Realize"  columns  would  represent  the  Deficiency,  if  the  former  column  exceeds  the  latter; 
otherwise  a  Surplus. 

5.  Reserve  accounts  may  be  shown  as  a  deduction  from  the  assets  to  which  they  are  related  or  treated 
as  a  part  of  the  surplus  and  deducted  from  the  estimated  losses  anticipated  from  liquidation. 

Deficiency  Statement 

This  statement  which  is  supplementary  to  the  statement  of  affairs  shows  the  causes  leading  up  to  the 
deficiency  of  assets.  This  statement  may  be  said  to  bear  the  same  relation  to  a  profit  and  loss  statement 
prepared  from  the  books  as  the  statement  of  affairs  bears  to  a  balance  sheet.  The  statement  of  affairs 
shows  the  extent  of  the  financial  embarrassment ;  the  deficiency  statement  explains  the  causes  of  such  em- 
barrassment. The  statement  is  begun  by  showing  the  net  worth  of  the  business.  Insolvency  means  that 
the  liabilities  of  the  business  must  exceed  the  assets.  The  estimated  shrinkage  in  assets  must  therefore 
exceed  the  net  worth  as  shown  by  the  capital  accounts  or  by  the  capital  stock  plus  the  surplus,  before  the 
business  can  be  regarded  as  literally  insolvent,  or  before  the  statement  would  show  a  deficiency.  However, 
where  the  business  is  not  actually  insolvent  the  deficiency  statement  could  still  be  prepared  showing  the 
impairment  of  capital  as  a  result  of  the  anticipated  shrinkage  due  to  liquidation. 

Realisation  and  Liquidation  Account 

This  account  called  for  by  numerous  C.  P.  A.  pr  >blems  like  the  two  statements  previously  explained 
is  purely  theoretical  as  far  as  the  work  of  the  Americ  in  accountant  is  concerned.  An  understanding  of  the 
account,  however,  emphasizes  the  principles  involved  inclosing  out  the  ledger  accounts  of  a  business  and 
provides  material  for  testing  the  reasoning  powers  of  the  student  as  well.  As  Esquerre  well  says  in  his 
"Applied  Theory  of  Accounts,"  such  a  statement  "requires  less  ingenuity  than  belief  in  the  truth  of 
accounting  principles  and  ability  to  handle  delicate  accounting  mechanisms.  In  fact,  the  Realization  and 
Liquidation  account  is  practically  a  copy  of  the  transactions  incident  to  the  liquidation  so  arranged  as  to 
make  it  possible  for  a  reader  not  wholly  deficient  in  accounting  knowledge  to  perceive  at  a  glance  the 
nature  of  the  closing  operations.  If  the  statement  is  adequately  prepared,  one  must  be  able  to  single  out 
any  asset,  ascertain  its  original  amount,  its  increase  during  liquidation,  the  proceeds  of  its  sale,  and  the  gain 
or  loss  made  on  its  realization." 

The  Statement  of  Affairs  is  an  estimate  prepared  by  the  receiver  or  trustee  in  bankruptcy  of  what  he 
thinks  will  probably  be  realized  from  the  assets  that  are  turned  over  to  him  and  showing  what  the  unse- 
cured creditors  may  expect  in  settlement.  The  Realization  and  Liquidation  account,  on  the  other  hand, 
shows  what  he  has  actually  accomplished. 


49 


The  function  of  the  account  may  be  stated  as  follows: 

REALIZATION  AND  LIQUIDATION 

DR.  CR. 

a.  With  all  assets  to  be  realized.  (Cash  does  a.  With  all  liabilities  to  be  liquidated.  (Net 
not  need  to  be  included.)  Worth  not  included.) 

b.  With  all  liabilities  liquidated.  b.     With  all  assets  realized. 

c.  With  all  liabilities  not  liquidated.  c.     With  all  assets  not  realized. 

d.  With  all  payments  made  in  addition  to  lia-  d.  With  all  credits  arising  from  sales,  dis- 
bilities  liquidated.  (Often  spoken  of  as  Supple-  counts,  etc.  (Often  spoken  of  as  Supplementary 
mentary  Charges.)  Credits.) 

The  balance  of  the  account  shows  a  loss  on  Realization  and  Liquidation  if  the  debit  side  is  the  larger 
and  a  gain  if  the  credit  side  is  larger. 

The  following  problems  and  their  solutions  illustrate  the  principles  that  are  involved  and  provide 
models  which  may  be  followed  in  preparing  the  assigned  work. 

PROBLEM  A 
(From  New  York  C.  P.  A.  Examination,  October,   1907.) 

The  Nassau  Engineering  Company  fails  and  a  receiver  is  appointed  on  March  1,  1907,  who  on  taking 
charge  finds  the  company's  liabilities  and  assets  to  be  as  follows :  Creditors,  unsecured,  $59,000 ;  partly 
secured,  $16,500;  fully  secured,  $13,500.  The  company  owns  real  estate  $15,000  which  is  mortgaged  for 
$10,000 ;  machinery  and  tools,  $30,000 ;  materials,  $3,000,  and  book  debts,  $9,000,  including  $2,500  in  litiga- 
tion on  which  a  loss  of  50%  is  expected;  also  securities  of  the  value  of  $22,500  acquired  in  settlements,  of 
which  $7,500  are  pledged  with  partly  secured  creditors  and  $14,000  With  fully  secured  creditors.  There 
are  engineering  contracts  in  force  to  the  amount  of  $60,000  on  which  $45,000  has  been  expended.  Cash 
in  bank,  $750.  The  capital  stock  of  the  company  is  $75,000,  and  the  accumulated  losses  on  contracts,  bad 
debts  written  off  and  expenses  show  a  deficiency  of  $48,850.  Customers'  bills  have  been  discounted  to 
the  amount  of  $4,500,  of  which  $1,500  will  be  dishonored  in  consequence  of  failure  of  obligor.  The 
machinery  and  tools  are  expected  to  realize  only  50%  of  the  book  value,  and  the  real  estate  is  appraised  at 
$12,000.  The  cost  to  complete  contracts  is  estimated  at  $30,000  by  the  sureties  who  offer  $2,250  for  the 
stock  of  materials  on  hand:  Unpaid  taxes  and  assessments  amounting  to  $216  are  discovered  but  no  entry 
thereof  appears  in  the  company's  books. 

Prepare  a  statement  of  affairs  and  deficiency  account  in  technical  form. 


50 


NASSAU  ENGINEERING  COMPANY 

STATEMENT  OF  AFFAIRS,  MARCH,  1,  1907. 

Expected  to 
Assets  Book  Value        Realize 

Cash  $750.00  $750.00 

Accounts  Receivable   9,000.00  7,750.00 

($2,500  in  liquidation  on  which  a  loss  of  50%  is  expected) 

Securities  Owned  22,500.00 

Less: 

SI 4,000  pledged  with  fully  secured  creditors  having  claims  of $13,500 

Pledged  with  partly  secured  creditors 7,500 

1,500.00 

Materials 3,000.00  2,250.00 

Engineering  Contracts 45,000.00 

Contract  price  $60,000 

Less: 

Estimated  cost  to  complete 30,000 

30,000.00 

Real  Estate 15,000.00 

Appraised  value $12,000 

Less: 

Mortgage  as  per  contra 10,000 

2,000.00 

Machinery  and  Tools 30,000.00         15,000.00 

Total   $125,250.00      $59,250.00 

Deduct : 

Preferred  Claim's : 

Unpaid  Taxes  and  Assessments 216.00 

Balance  available  for  unsecured  creditors $59,034.00 

Deficiency 10,566.00 

$69,600.00 

Liabilities  As  per  Expected 

Unsecured  Gaims :  Books  to  Rank 

Accounts  Payable $59,100.00      $59,100.00 

Notes  Receivable  Discounted 1,500.00 

Partly  Secured  Claims : 

Accounts  Payable 16,500.00  9,000.00 

Fully  Secured  Claims: 

Mortgage  Payable 10,000.00 

Accounts  Payable 13,500.00 

(Deducted  as  per  contra) 

Preferred  Claims : 

Unpaid  Taxes  and  Assessments 

(Not  shown  on  books.    Deducted  as  per  contra) 

Total  Liabilities  as  per  Books 99,100.00 

Total  Unsecured  Claims  69,600.00 

$69,600.00 


51 


NASSAU  ENGINEERING  COMPANY 

DEFICIENCY  STATEMENT,  MARCH  1,  1907 
Net  Worth: 

Capital  Stock $75,000.00 

Deduct : 

Debit  Balance  to  Profit  and  Loss $48,850 

Expenses  and  losses  not  on  Books : 

Taxes  and  assessments $216 

Less  due  to  endorsement  of  discounted  note 1,500 

1,716 

50,566.00 

$24,434.00 

Anticipated  Losses  in  Liquidation : 
Shrinkage  in  Assets : 

Real  Estate   $3,000 

Machinery  and  Tools 15,000 

Materials  750 

Accounts  Receivable 1,250 

20,000.00 

Losses  on  Uncompleted  Contracts 15,000.00 

" 35,000.00 

Deficiency  (Excess  of  Anticipated  Losses  over  Net  Worth)    $10,566.00 

Problem  B 
(From  New  York  C.  P.  A.  Examination,  June,  1907.) 

The  Fox  &  Dix  Company,  a  close  corporation,  became  embarrassed  through  the  failure  of  a  friendly 
company  to  whom  they  had  given  their  accommodation  paper,  and  a  trustee  was  appointed  February  1,  1906, 
to  take  charge  of  their  affairs  for  the  benefit  of  the  creditors. 

The  condition  of  the  Estate,  When  the  trustee  took  charge,  was  as  follows : 

Liabilities 

Mortgage  on  real  estate,  maturing  Feb.  1,   1907  $15,000.00 

Interest,  due  Feb.  1,  1906,  six  months  at  5% 375.00 

Taxes  due 210.00 

Book  accounts  payable 3,900.00 

Bills  payable  (including  accommodation  papar,  $56,000.00) 57,400.00 

Capital  stock   40,000.00 

Surplus,  per  profit  and  loss  account 3,987.00 

$120,872.00 
Assets 

Cash  on  hand  and  in  bank $650.00 

Merchandise  (stock  of  goods) 25,310.00 

Book  debts  (including  accommodation  account,  $56,000.00)    60,800.00 

Bills  Receivable 4,112,00 

Real  Estate 30,000.00 


$120,872.00 


In  order  to  complete  contracts  and  so  realize  to  the  best  advantage  on  the  goods  in  stock,  the  trustee 
purchased  merchandise  to  the  amount  of  $50,000,  and  during  the  year  collected  $100,002  cash  from  sales. 

The  accommodation  account  was  settled  for  60%.  The  other  book  debts  realized  $4,100,  and  the 
bills  receivable  $3,600.     Balance  lost. 

The  accommodation  paper  was  settled  by  paying  $40,000  cash  and  renewing  $16,000,  entailing  legal 
fees,  interest,  and  petty  expenses  of  $2,200. 

52 


The  other  bills  payable,  the  accounts  payable,  taxes  and  interest  on  mortgage  for  eighteen  months,  were 
paid  in  course  of  settlement,  and  the  principal  of  the  mortgage  was  paid  off  at  maturity. 

The  running  expenses  were  as  follows:  Clerk  hire,  $1,500;  office  expenses,  $1,000;  allowances  to 
officers,  $3,000;  trustee's  commissions,  $3,000. 

On  February  1,  1907,  the  trustee  surrendered  charge  of  the  company's  offices  and  paid  over  the  cash 
balance  in  his  hands.  On  said  date  there  were  also  uncollected  book  debts  $2,000,  and  merchandise  stock 
$8,000. 

Prepare  a  realization  and  liquidation  account,  a  trustee's  cash  account  and  a  balance  sheet  of  the  estate 
at  termination  of  trust. 

FOX  AND  DIX  COMPANY 

ENTRIES  ON  GENERAL  BOOKS 

February  1,  1906 

Trustee   $650 

To  Cash  $650 

To  charge  trustee  for  cash  turned  over  to  him. 

Trustee  120,222 

To  Merchandise   25,310 

Accommodation  Account 56,000 

Accounts  Receivable 4,800 

Bills  Receivable 4,112 

Real  Estate 30,000 

To  charge  the  trustee  for  assets  turned  over  to  him. 

Mortgage  Payable 15,000 

Interest  Accrued  on  Mortgage 375 

Accounts  Payable  3,900 

Accommodation  Paper 56,000 

Bills  Payable  1,400 

Taxes  Accrued   .' 210 

To  Trustee 76,885 

To  credit  the  trustee  for  the  liabilities  accrued  by  him. 

February  1,  1907 

Cash  19,617 

To  Trustee 19,617     . 

To  credit  trustee   for  balance  of   cash  on  hand  at  close  of 
trusteeship  as  per  Trustee's  Cash  Account. 

Accounts  Receivable    2,000 

Merchandise 8,000 

Real  Estate  30,000 

To  Trustee 40,000 

To  credit  trustee  for  the  assets  not  realized  as  per  Realization 
and  Liquidation  Statement. 

Trustee   16,000 

To  Bills  Payable 16,000 

To  charge  the  trustee  for  liability  not  liquidated  as  per  Real- 
ization and  Liquidation  Statement. 

Profit  and  Loss 370 

To  Trustee 370 

To  credit  the  Trustee  for  the  net  loss  sustained  during  the 
trusteeship. 

Surplus   370 

To  Profit  and  Loss 370 


53 


ENTRIES  ON  TRUSTEE'S  BOOKS 

February  1,  1906 

Cash  $650 

To  Fox  and  Dix  Company $  650 

To  credit  Fox  and  Dix  Company  for  cash  turned  over  by 
them. 

Merchandise   25,310 

Accommodation  Account 56,000 

Accounts  Receivable 4,800 

Bills  Receivable 4,112 

Real  Estate 30,000 

To  Fox  and  Dix  Company 120,222 

To  credit  Fox  and  Dix  Company  for  assets  turned  over  by 
them. 

Fox  and  Dix  Company 76,885 

To  Mortgage  Payable 15,000 

Interest  Accrued  on  Mortgage '. 375 

Accounts  Payable 3,900 

Accommodation  Paper 56,000 

Bills  Payable  1,400 

Taxes  Accrued 210 

To  charge  Fox  and  Dix  Company  for  liabilities  to  be 
liquidated. 


54 


ENTRIES  DURING  PERIOD  OF  TRUSTEESHIP 

Merchandise   $50,000 

To  Cash   $50,000 

Merchandise  purchased  in  order  to  complete  contracts  and  so 
realize  on  goods  in  stock  to  the  best  advantage. 

Cash  100,002 

Accounts  Receivable '  2,000 

To  Merchandise 102,002 

Sales  made  by  trustee. 

Cash  33,600 

To  Accommodation  Account  33,600 

Accommodation  Account  settled  for  60  cents  on  the  dollar. 

Cash 7,700 

To  Accounts  Receivable 4,100 

Bills  Receivable 3,600 

Amounts  collected  on  assets. 

Accommodation  Paper 56,000 

To  Cash  .  : 40,000 

Bills  Payable  16,000 

Accommodation  paper  settled  by  paying  $40,000  in  cash  in 
renewing  $16,000. 

Trustee's  Expenses 2,200 

To  Cash   2,200 

Expenses  incidental  to  settling  accommodation  paper. 

Bills  Payable  1,400 

Accounts  Payable  3,900 

Taxes  Accrued   210 

Interest  Accrued  on  Mortgage 375 

Interest  on  Mortgage 750 

To  Cash 6,635 

Cash  paid  in  settlement  of  liabilities. 

Mortgage  Payable 15,000 

To  Cash 15,000 

Cash  paid  in  settlement  of  mortgage. 

Trustee's  Expenses 8,500 

To  Cash 8,500 

Clerk  hire $1,500 

Office  expenses  1,000 

Allowances  to  officers 3,000 

Trustee's  commissions  3,000 

$8,500 


55 


February  1,  1907 

Fox  and  Dix  Company 40,000 

To  Accounts  Receivable 2,000 

Merchandise    , 8,000 

Real  Estate 30,000 

To  charge  assets  on  hand  at  end  of  trusteeship  to  Fox  and 
Dix  Cpmpany. 

Fox  and  Dix  Company  19,617 

To  Cash 19,617 

Cash  turned  back  to  Fox  and  Dix  Company  at  end  of  trustee- 
ship. 

Bills  Payable  

To  Fox  and  Dix  Company 

To  credit  Fox  and  Dix  Company  for  liability  not  liquidated. 

Merchandise 

To  Trustee's  Profit  and  Loss 

Gross  profit  on  sale  of  merchandise. 

Trustee's  Profit  and  Loss 

To  Accommodation  Account 

Accounts  Receivable 

Bills  Receivable 

To  close  losses  sustained  in  realizing  on  assets  into  Profit 
and  Loss  account. 

Trustee's  Profit  and  Loss 

To  Trustee's  Expenses 

Interest  on  Mortgage 

To  close  the  expenses  incurred  during  the  trusteeship. 

Fox  and  Dix  Company 370 

To  Trustee's  Profit  and  Loss 370 

To  charge  Fox  and  Dix  Company  for  the  net  loss  sustained 
during  the  trusteeship. 

FOX  AND  DIX  COMPANY 

REALIZATION    AND    LIQUIDATION    ACCOUNT 

February  1,  1907 

ASSETS  TO  BE  REALIZED : 

Merchandise $25,310 

Accommodation  account   56,000 

Accounts  receivable   4,800 

Bills  receivable   4,112 

Real  estate 30,000 


16,000 

16,000 

34,692 

34,692 

23,612 

22,400 

700 

512 

11,450 

10,700 

750 

NEW  ASSETS  ACQUIRED  DURING  TRUSTEESHIP: 

Merchandise  purchased , 50,000 

Accounts  receivable   (charge  sales) ►. 2,000 


$120,222 


52,000 


TOTAL  ASSETS   $172,222 


56 


LIABILITIES  LIQUIDATED: 

Mortgage  payable 15,000 

Interest  accrued  on  mortgage  (six  months  to  Feb.  1,  1906) 375 

Accounts  payable   3,900 

Accommodation  paper 40,000 

Bills  payable 1,400 

Taxes  accrued  to  Feb.  1,  1906 210 

60,885 

LIABILITIES  NOT  LIQUIDATED: 

Bills  payable   16,000 

TRUSTEE'S  EXPENSES : 

Expenses  of  settling  accommodation  paper 2,200 

Clerk  hire 1,500 

Office  expenses   1,000 

Allowances  to  officers  3,000 

Trustees'  commissions 3,000 

10,700 

SUPPLEMENTARY  CHARGED : 

Interest  on  mortgage  (one  year  to  Feb.  1,  1907) 750 

260,557 
LIABILITIES  TO  BE  LIQUIDATED: 

Mortgage  Payable    15,000 

Interest  accrued  on  mortgage 375 

Accounts  payable   3,900 

Accommodation  paper 56,000 

Bills  payable   1,400 

Taxes  accrued 210 

TOTAL  LIABILITIES  76,885 

ASSETS  REALIZED : 

Merchandise 102,002 

Accommodation  account  33,600 

Accounts  receivable   4,100 

Bills  receivable 3,600 

143,302 

ASSETS  NOT  REALIZED : 

Merchandise   8,000 

Accounts  receivable  2,000 

Real  estate 30,000 

40,000 

NET  LOSS  INCURRED  DURING  TRUSTEESHIP 370 

$260,557 
(The  Cash  account  and  Balance  Sheet  asked  for  in  the  problem  are  not  given  as  they  present  no 
difficulties.) 

PROBLEMS 

59.  The  John  Smith  Company  finds  itself  in  financial  difficulties  and  the  proper  legal  proceedings 
having  been  followed,  a  trustee  is  appointed  to  take  charge  of  the  affairs  of  the  concern.  The  following" 
trial  balance  was  taken  from  the  books  on  October  1,  1916: 


57 


JOHN  SMITH  COMPANY 

TRIAL  BALANCE— OCTOBER  1,  1916 

Cash  on  Hand $30         Accounts  Payable $8,000 

Cash  in  Bank 250         Notes  Payable  2,000 

Merchandise 1,300         Loan  Payable 1,300 

Accounts  Receivable 5,850         Notes  Receivable  Disct 1,500 

Machinery 3,000         Mortgage  Payable 7,000 

Real  Estate 12,000        Wages  Accrued 150 

Securities  Owned   1,500         Taxes  Accrued   60 

Deficit   1,080         Capital  Stock 5,000 


$25,010  $25,010 

Of  the  items  listed  above,  it  is  estimated  that  the  merchandise  on  hand  will  sell  for  $950 ;  of  the 
accounts  receivable  $4,000  are  thought  to  be  good,  $1,200  bad,  and  $650  doubtful  of  collection,  and  it  is 
estimated  that  about  $4,100  will  be  collected;  the  machinery  will  bring  $1,000  at  forced  sale;  the  real  estate 
is  appraised  at  $9,000  and  is  mortgaged  for  $7,000 ;  the  securities  owned  have  a  market  value  of  $1,000 
and  are  pledged  jis^  collateral  for  a  loan  made  to  the  company  amounting  to  $1,300. 

In  order  to  realize  on  the  merchandise  on  hand  to  the  best  advantage  the  trustee  made  purchases 
amounting  to  $3,500,  of  which  $1,500  was  for  cash,  and  the  entire  stock  of  merchandise  was  disposed  of 
for  $4,350.  The  trustee  collected  $4,400  on  accounts  receivable.  The  machinery  was  sold  for  $1,000.  The 
real-estate-  was  sold  for  $9,500,  of  which  $7,060  went  to  the  mortgages  for  principal  and  interest.  The 
securities  were  sold  for  $1,035. 

The  payments  made  by  trustee  on  account  of  expenses  were  as  follows :  Wages,  $760 ;  taxes,  $60 ; 
office  expenses,  $350;  trustee's  commissions,  $250. 

Interest  on  cash  on  deposit  was  allowed,  $15.00.  'After  the  liquidating  expenses  and  preferred  claims- 
had  been  paid,  the  cash  remaining  in  the  business  wa's  distributed  among  the  unsecured  creditors  in  the 
proper  proportion. 

The  outstanding  stock  certificates  are  then  canceled  and  the  affairs  of  the  company  permanently  closed. 

Prepare  Realization  and  Liquidation  account  and  Trustee's  cash  account. 


60.     (From  Examination  for  Admittance  to  the  American  Institute  of  Accountants,  June,  1917.) 

"      BALANCE  SHEET  OF  AB 

Real  estate $140,000.00         Capital   .' $229,652.00 

Equipments 75,150.00         Mortgages  on  real  estate 75,000.00 

Patents    .' . .         54,700.00         Accounts  payable   124,615.24 

Investments    33,500.00         Notes  payable   80,000.00 

Cash    ^ 4,348.64         Reserve  for  depreciation 821.00 

Notes  receivable 2,479.75 

Accounts  receivable  31,108.15 

Inventories   81,423.70 

Good  will   40,000.00 

Trading  losses ' 47,378.00 


$510,088.24  $510,088.24 

AB,  whose  balance  sheet  appears  above,  having  been  unfortunate  in  business,  goes  into  liquidation. 
Prepare  statement  of  affairs  and  deficiency  account. 

The  real  estate  is  valued  at  $90,000,  the  equipment  at  $30,000.  The  patents  are  considered  worthless, 
with  the  exception  of  one  thought  to  have  a  market  value  of  $5,000.  Bonds,  with  a  par  value  of  $27,500, 
were  pledged  to  secure  a  collateral  loan  of  $25,000.  These  have,  however,  shrunk  in  value  so  as  to  be  worth 
at  present  prices  only  $22,000.  Included  in  investments  are  $5,000  other  bonds  which  are  clearly  worthless ; 
the  other  investments  have  a  doubtful  value  of  50  per  cent.  The  notes  receivable  are  thought  to  be  good. 
Of  the  accounts  receivable  $10,000  are  known  to  be  good,  $5,000  are  known  to  be  bad,  and  the  remainder 
are  expected  to  pay  80  per  cent.  The  inventories  are  estimated  as  worth  not  more  than  half  of  their  book 
value.  Goodwill  is  purely  fictitious.  Interest  accrued  on  the  mortgage  is  $800,  on  notes  payable,  $523. 
Wages  accrued  are  $1,200. 

58 


Assuming  the  foregoing  estimates  of  value  are  correct  and  the  expenses  of  liquidation  amount  to  $3,000, 
what  percentage  of  their  claims  will  the  general  creditors  receive? 

61.  (From  Massachusetts  C.  P.  A.  Examination,  October,  1915.) 
The  accounts  of  a  partnership  include : 

Cash  $1,400.00 

Merchandise   , 15,000.00 

Accounts  Receivable 20,000.00 

Notes  Receivable 4,000.00 

Machinery 7,000.00 

Real  Estate 5,000.00 

Investments 2,500.00 

Mortgage  Payable  on  Real  Estate 3,000.00 

Notes  Payable 16,000.00 

Accounts  Payable  35,000.00 

Taxes  Due 500.00 

Wages  Due 1,000.00 

Rent  Due  700.00 

Notes  Receivable  Discounted 3,000.00 

Partners'  Accounts 12,000.00 

All  the  investments  are  pledged  as  collateral  on  $1,500.  Notes  Payable.  Of  the  Accounts  Receivable 
$1,000  are  considered  bad,  $2,500  doubtful  and  worth  50%  of  book  value,  and  the  balance  good.  Real 
Estate  is  undervalued  10%.  Merchandise  is  subject  to  a  discount  of  25%.  Machinery  is  overvalued  25%. 
$2,000  Notes  Receivable  Discounted  has  been  paid  by  makers.  Expense  of  liquidation  estimated  to  amount 
to  $1,500.    The  partners  have  personal  estates  valued  at  $4,000. 

Prepare  such  statements  as  seem  desirable  under  the  circumstances,  and  state  probable  amount  for 
distribution  among  creditors. 

62.  (From  New  York  C.  P.  A.  Examination,  January,  1902.) 

John  Thompson  exhibits  the  following  balance  sheet  of  his  business,  dated  June  30,  1900 : 

Cash  $750         Sundry  creditors $6,000 

Book  debts 9,500         Bills  payable 7,500 

Stock  on  hand 6,500         Bank  (overdraft)   3,000 

Fixtures,  etc 1,750         Balance 2,000 


$18,500  $18,500 

On  questioning  Thompson  it  was  found  that  he  had  omitted  the  following  from  his  balance  sheet: 
$250  owing  for  rent;  $75  owing  for  taxes;  $2,500  borrowed  at  5%  from  his  wife  three  years  ago,  no  pay- 
ment having  been  made  on  account  of  either  principal  or  interest ;  a  draft  for  $500  accepted  by  a  firm 
without  consideration,  falling  due  in  30  days.    His  private  and  household  debts  amounted  to  $600. 

The  item  entered  on  his  balance  sheet  as  cash  included  his  personal  I.  O.  U.  for  $600. 

Of  the  book  debts  about  $3,500  might  be  considered  bad  and  the  rest  good.  The  stock  was  good 
except  $1,000  which  would  not  produce  more  than  $100.  The  fixtures,  if  sold,  would  not  realize  more 
than  $250.  The  only  other  assets  were  household  furniture  worth  about  $1,250  and  residence  valued  at 
$7,500  subject  to  a  first  mortgage  for  $5,000  at  4%,  and  also  a  second  mortgage  held  by  his  bank  as 
security  for  overdraft. 

Prepare  a  statement  of  affairs  and  deficiency  account. 


59 


63.     (From  Ohio  C.  P.  A.  Examination,  November,  1913.) 

The  firm  of  Smith  &  Jones,  of  Columbus,  Ohio,  a  partnership,  was  forced  into  bankruptcy.     To  pro- 
tect creditors,  each  of  the  partners  has  also  filed  a  voluntary  petition  in  bankruptcy. 
A  trial  balance  taken  from  the  firm  books  at  October  31,  1913,  is  as  follows : 

John  Smith $35,000.00 

William  Jones 45,000.00 

Cash '. $875.00 

Land    , 10,000.00 

Buildings  30,500.00 

Machinery,  Tools,  etc 35,000.00 

Furniture  and  Fixtures 1,500.00 

Horses  and  Wagons 2,350.00 

Accounts  Receivable -.  58,900.00 

Notes  Receivable 18,700.00 

Mortgage  Payable  (Real  Estate) 25,000.00 

Accounts  Payable 105,250.00 

Notes  Payable  42,500.00 

Merchandise  (Inventory  1/1/13) 59,725.00 

Sales   516,875.00 

Purchases  196,375.00 

Productive  Labor 130,500.00 

Manufacturing  Expenses 125,000.00 

Selling  Expenses 70,500.00 

Administrative  and  all  other  Expenses 29,700.00 


;'  $769,625.00     $769,625.00 

The  mortgage  is  past  due — interest,  6% — last  interest  payment,  July  1,  1913. 

Accrued  interest  on  notes  receivable  (good)  amounts  to  $225. 

Accrued  interest  on  notes  payable  amounts  to  $9.00. 

There  were  invoices  for  purchases  amounting  to  $1,800,  and  wages,  $2,010,  not  recorded  on  books. 

Unexpired  insurance  premiums  amount  to  $350. 

Accrued  taxes  amount  to  $425. 

There  is  a  chattel  mortgage  on  the  machinery  securing  notes  payable,  amounting  to  $10,000,  and  one 
of  the  creditors  on  open  account  holds  a  chattel  mortgage  of  $4,000  on  merchandise  worth  $2,500  given  for 
purchases,  the  balance  due  on  which  is  $3,000. 

$7,500  of  the  good  notes  receivable  have  been  assigned  to  secure  notes  payable  for  borrowed  money. 

The  notes  receivable  are  classified :   $14,500,  good ;  $1,800,  doubtful ;  and  the  balance,  worthless. 

The  accounts  receivable  are  classified:    $40,500,  good;  $3,500,  doubtful;  and  the  balance,  worthless. 

The  land  was  appraised  at  $12,000 ;  buildings,  $25,000 ;  machinery  and  tools,  $26,000 ;  furniture  and 
fixtures,  $600 ;  horses  and  wagons,  $1,500;  and  the  merchandise  inventory,  at  $32,200. 

The  personal  estate  of  Jones  consists  of  a  house  and  lot  valued  at  $18,000,  and  securities  valued  at 
$7,500,  and  he  owes  for  household  debts,  $750,  and  to  his  father-in-law,  in  notes  payable,  $20,000,  for 
money  borrowed  from  him. 

The  personal  estate  of  Smith  consists  of  a  house  and  lot  valued  at  $12,000,  upon  which  there  is  a  mort- 
gage of  $5,000 ;  securities  valued  at  $20,000,  pledged  as  collateral  for  a  loan  of  $15,000.  He  has  other 
unsecured  debts  amounting  to  $2,990. 

From  the  foregoing  prepare : 

a.-    Statement  of  affairs,  Smith  &  Jones,  October  31,  1913,  exhibiting  thereon  also  the  percentage 
of  their  claims  likely  to  be  realized  by  unsecured  creditors. 

b.  Deficiency  account. 

c.  In  order  to  give  you  credit  for  knowledge  of  principles  involved,  as  well  as  technical  accuracy 

of  solution,  attach  also  your  "working  sheets,"  showing  how  you  arrived  at  solution. 

64.     (From  Ohio  C.  P.  A.  Examination,  November,  1913.) 

The  firm  of  Cleveland  &  Marion  is  unable  to  secure  working  capital  and  calls  a  meeting  of  its  creditors 
on  May  15,  1912,  which  results  in  the  appointment  of  a  friendly  receiver.     The  receiver  takes  over  the 

60 


business  and  operates  it  for  one  year  without  the  active  co-operation  of  the  partners.  At  the  end  of  the  year 
the  receiver  turns  the  business  back  to  the  partners,  who,  during  the  receivership,  have  received  no  cash  or 
property  of  any  kind  from  the  receiver.  The  trial  balance  of  Cleveland  &  Marion  at  May  15,  1912,  is  as 
follows : 

Cash   $10;. so 

Bills  Receivable 5,000.00 

Accounts  Receivable 22,096.54 

Furniture  and  Fixtures •  800.00 

Goodwill 20,000.00 

Accounts  Pavable $32,641.88 

Bills  Payable   7,000.00 

Cleveland  Drawing  Account 450.87 

Cleveland  Capital  Account 5,862.98 

Marion  Drawing  Account , ; .  492.61 

Marion  Capital  Account  (5,0.5 ?.15 

Reserve  for  Bad  Debts "  2,270.00 

Reserve  for  Depreciation  of  Furniture  and  Fixtures 160.00 

Purchases 13,996.25 

Return  Purchases 1 76.50 

Interest  and  Discount 462.97 

Salaries  and  Wages 2,941.00 

Rent   600.00 

Miscellaneous  Supplies  and  Fxpense 431 .22 

General  Expense 27 6,48 

Sales   ....-.' 14,5:;-.'.; 5 

Return  Sales    1  15.50 


$(58,7  01.2!       $68,701.24 

The  merchandise  inventory  at  January  1,  1912,  was  $2,500,  and  this  amount  is  included  in  Purchases 
-tated  in  the  above  trial  balance.  The  merchandise  inventory  at  May  15,  1912,  was  $3,000.  There  were 
no  other  inventories. 

The  receiver  collected  $4,000  from  the  bills  receivable  at  May  15,  1912,  and  $18,752.89  from  the  accounts 
receivable  at  May  15,  1912,  and  reported  that  the  remaining  notes  and  accounts  were  worthless.  He  paid 
in  full,  all  of  the  bills  payable  at  May  15,  1912,  and  settled  all  of  the  accounts  payable  at  May  15,  1912, 
at  seventy-five  cents  on  the  dollar. 

At  the  end  of  his  receivership,  he  returned  to  Cleveland  &  Marion  the  assets  of  May  1">,  1912,  then  in 
his  possession,  and  he  turned  over  to  them  the  assets-  and  liabilities  which  resulted  from  his  operation  of 
the  business.     A  summary  of  his  operation  showed  the  following  transactions: 

Sales $61,102.42 

Purchases,  not  including  inventory  at  May,   15,  1912 29,896.68 

Operating  Expenses  (all  paid  in  cash) 1 2,293.75 

Expenses  and  Fees  of  Receivership  (all  paid  in  cash  )    2,9  13.90 

-h  Receipts  for  New  Customers 1 9,9(52. 31 

Cash  Receipts  for  Purchases 25,987. 16 

Inventory  at  end  of  receivership ;,-  50.00 

Prepare  such  statement  or  Statements  a^  you  consider  necessary  to  show  the  result  of  realization  and 
liquidation  and  of  the  receiver's  trading,  and  the  »<'/  result  of  the  two.  The  receiver's  cash  account  and 
balance  Nheet  at  termination  of  receivership  are  not  required. 


.,1 


Go.     (From  Michigan  C.  P.  A.  Examination,  190!).) 

X,  Y  and  Z,  foundry  men,  unable  to  meet  their  obligations,  suspend  payment  January  1,  1908,  and  ap- 
point a  trustee  to  realize  and  liquidate  for  the  benefit  of  their  creditors.  The  books  showed  the  following 
assets  and  liabilities : 


Assets 

Land  and  Buildings $125,000 

Machinery  and  Tools.  . . ., 75,000 

Furniture  and  Fixtures 10,000 

Materials  and  Supplies 95,000 

Notes  Receivable 1 5,000 

Accounts  Receivable 1 1.5,000 

Cash 450 


LlAIULITIES 

Mortgage  on  Foundry  Premises $100,000 

Notes  Payable  135,000 

Accounts  Payable  105,000 

Interest  Accrued  on  Mortgage 1,250 

Taxes  accrued  (est.) 835 

Capital   93,363 


$435,450 
The  trustee's  cash  receipts  and  payments  during  the  year  1908  are  as  follows 


$435,450 


Receipts 

Notes    Receivable    (Outstanding    Jan.    1, 

1908)  $15,000 

Accounts    Receivable    (Outstanding    Jan. 

1,  1908)    106,500 

Cash  Sales   5,435 

Notes     Receivable      (Contracted     during 

1908)  ..      13,500 

Accounts   Receivable    (Contracted   during 

1908)  212,000 


Payments 

Notes  Payable  $25,000 

Accounts  Payable 35,000 

Interest  on  Mortgage  one  year  at  5%. . . .  5,000 

Taxes  for  year  1907 865 

Purchase  of  Material  and  Supplies 98,000 

Labor 135,000 

General  Expenses 45,000 

Interest  on  Bills  Payable  to  Sept.  30,  1908, 

at  5% , 2,800 


Total  Receipts $352,435 

Other  transactions  were  as  follows : 


Total  Payments $346,665 

$335,000 


Sales  on  Credit 

Bad  debts  written  off  accounts  prior  to  January  1,  1908  $8,000 

Bad  debts  written  off  accounts  subsequent  to  January  1,  1908 2,000 


Discounts  and  allowances  to  Customers'  Accounts  prior  to  January  1,  1908 

Discounts  and  allowances  to  Customers'  Accounts  subsequent  to  January  1,  1908. 

Notes  received  from  customers 

Notes  given  to. creditors  ($110,000  being  renewals) 

Inventory  of  Materials,  December  31,  1908 


500 
300 


10,000 


800 

20,000 

180,000 

92,000 


At  the  end  of  the  year  the  business  was  returned  to  the  owners. 
Prepare  realization  and  liquidation  account ;  and  balance  sheet. 

66.     (From  Massachusetts  C.  P.  A.  Examination,  April,  1911.) 

The  Brown  Mfg.  Corporation,  finding  its  credit  impaired,  prepares  the  following  statement,  as  of  Janu- 
ary 1,  1908: 


Assets 

Plant    '.. $248,607 

Merchandise 345,156 

Accounts  Receivable 174,216 

Cash    1,067 


Liabilities 

Capital  Stock $200,000 

Accounts  Payable  488,361 

Profit  and  Loss , 80,685 


$769,046 


$769,046 


By  agreement  of  all  concerned,  the  corporation  applied  for  receivers,  who  were  appointed  and  granted 
permission  to  operate. 

62 


The  receivers  took  no  inventory,  but  re- valued  certain  assets  in  above  statement  as  follows: 

Merchandise    $241,610 

Accounts  Receivable  139,373 

On  October  1,  1909,  having  paid  dividends  to  creditors  and  receivers'  expenses  aggregating  $362,845, 
the  receivers  reported  to  the  Court  the  following  condition :  Plant,  $241,747 ;  Merchandise,  $77,564 ;  Ac- 
counts Receivable,  $63,132 ;  Cash,  $47,637 ;  Accounts  Payable,  $186,883,  and  were  authorized  to  turn  over 
the  property  to  the  stockholders. 

Draw  up  entries  covering  the  following: 

a.  Corporation  books,  transfer  of  property  to  receivers. 

b.  Corporation  books,  recovery  of  property. 

c.  Balance  Sheet,  after  above  entries  are  made. 

d.  Receivers'  books,  opening. 

e.  Receivers'  books,  closing. 

67.     (From   Massachusetts  C.   P.   A.   Examination,  June,  1913.) 

A  corporation  with  a  balance  sheet  as  at  December  31,  1912,  given  below,  is  placed  in  charge  of  a 
receiver. 

Assets  Liabilities 

Cash    $12,188  Accounts  payable   $62,060 

Accounts  receivable 71,227  Notes  payable   60,000 

Investments    13,950  Capital  stock   50,000 

Inventory    83,312  Surplus    55,497 

Fixtures    46,880 


$227,557  $227,557 

An  examination  of  the  books  discloses  the  following: 

The  cash  consists  of  deposit  in  bank,  $10,550;  currency,  $595;  advanced  on  traveling  expenses,  $250; 
sundry  expense  vouchers,  $793. 

Accounts  Receivable : 

Contracted  in  1912 $51,822 — estimated  to  shrink  $500 

"1911 5,715—       "  "        "       25% 

"1910 3,180—       "  "        "       75% 

prior  to  1910 10,510— all  bad 

The  investments  were  considered  to  be  of  no  value.  The  inventories  were  found  to  contain  unsale- 
able stock  to  the  amount  of  $7,525. 

The  fixtures  were  bought  as  follows : 

In  1905 $5,115 

1906 3,002 

1907 2,150 

1908 17,810 

1909 1,005 

1910 4,505 

1911 6,115 

1912 7,178 

$46,880 

Fixtures  are  estimated  to  last  ten  years,  and  no  depreciation  has  been  entered  in  the  accounts.  Bills 
for  goods  received  amounting  to  $3,512  were  not  included  in  the  accounts  payable  of  $62,060.  The  receiver 
decides  to  reorganize  the  business  with  a  capital  stock  of  $150,000,  divided  as  follows:  $75,000  common, 
and  $75,000,  6%  preferred.  He  offers  the  creditors  75%  of  their  claims  in  preferred  and  25%  in  common 
stock,  with  a  bonus  of  25%  common.    This  is  accepted  by  creditors  holding  $60,000  worth  of  notes,  and 

63 


$40,000  of  claims  on  open  accounts.  He  offers  the  stockholders  in  the  old  corporation  one  share  of  common 
stock  in  the  new  corporation  for  every  two  shares  in  the  old  corporation.  This  is  accepted  by  all  of  them. 
He  estimates  that  the  new  corporation  can  do  a  business  of  $700,000  a  year  with  the  goods  costing  70%  ; 
that  his  expenses  will  be  $175,000 ;  that  he  will  allow  a  quarter  of  1%  for  bad  bills,  and  a  depreciation 
charge  of  10%  on  the  cost  of  fixtures. 

Submit  an  adjusted  balance  sheet  of  the  new  corporation,  and  an  estimated  operating  account  for  the 
first  year,  showing  the  estimated  percentage  earned  on  common  stock,  after  paying  dividends  on  preferred 
stock. 


64 


PART  VI 
ACCOUNTS  OF  TRUSTEES  AND  EXECUTORS 

From  the  standpoint  of  the  accountant,  most  problems  which  arise  in  connection  with  the  affairs  of  a 
trustee  or  an  executor  have  to  do  with  differentiating  between  principal  and  income  and  with  the  contents 
of  the  several  schedules  filed  with  the  probate  court. 

In  these  notes,  therefore,  no  attempt  is  made  to  prescribe  methods  of  bookkeeping  for  trustees  or  ex- 
ecutors or  to  set  forth  the  principle  of  probate  law  only  in  so  far  as  a  knowledge  of  the  law  is  necessary  to 
distinguish  between  the  principal  of  the  estate  and  the  income  derived  therefrom. 

The  statutes  of  the  various  states  prescribe  no  system  by  which  an  executor  or  trustee  is  required  to 
keep  his  accounts ;  individuals  acting  in  such  capacity  usually  keep  their  accounts  on  a  cash  basis,  recording 
only  receipts  and  disbursements  having  to  do  with  the  principal  and  income  of  the  estate.  These  may  be 
kept  separate  by  having  a  cash  book  for  each  or  by  using  a  single  cash  book  with  columns  on  each  side  headed 
respectively  "Principal"  and  "Income."  In  short,  the  system  used  should  be  one  that  would  show  all  details 
relating  to  the  estate  in  such  a  form  as  to  make  easy  c  f  preparation  the  account  required  by  the  probate  court 
covering  the  administration  of  the  estate. 

If  the  books  are  kept  by  double  entry,  the  balancing  account  showing  the  excess  of  assets  over  liabili- 
ties or  offsetting  the  assets  of  the  estate  is  the  Principal  account ;  the  balancing  account  showing  the  differ- 
ence between  items  of  income  and  expense  is  likewise  called  the  Income  account. 

PRINCIPAL  AND  INCOME 

The  following  are  mainly  extracts  from  the  law  relating  to  principal  and  income  or  from  reference 
works  on  the  subject.    Students  of  the  subject  are  referred  to  the  following  books: 

A  Trustee's  Handbook  by  Loring,  Published  by  Little,  Brown  &  Co.,  Boston, 
and  to 

Settlement  of  Estates,  by  Newhall,  Published  by  G.  A.  Jackson,  Boston. 

"In  general,  at  the  time  the  estate  comes  into  the  trustee's  hands  it  is  all  principal,  in  whatever  condi- 
tion it  may  happen  to  be,  and  all  yearly  increase  thereafter  is  income." — Loring. 

GAIN  AND  LOSS :  "The  general  rule  is  that  any  gain  other  than  the  usual  yearly  income,  and  any 
loss  other  than  the  usual  yearly  charges,  fall  to  the  principal  of  the  fund." — Loring. 

The  advance  in  value  of  real  estate  or  investments  without  any  increase  in  the  income  would  there- 
fore belong  to  principal  unless  the  life  tenant  can  force  a  sale  and  re-investment  by  which  his  income  is 
correspondingly  increased. 

If  a  business  is  continued  temporarily  in  order  that  values  may  not  be  sacrificed  due  to  a  hasty  conver- 
sion of  the  property,  any  gain  or  loss  arising  therefrom  is  apportioned. 

If  a  part  of  the  trust  be  invested  in  timber  land,  trees  cut  to  encourage  a  healthy  growth  are  income; 
other  timber  principal.    Sale  of  gravel  is  income. 

Any  loss  by  depreciation  of  the  market  value  must  be  borne  by  the  principal. 

DIVIDENDS :     The   current   dividends   on    stocks  belong  wholly  to  income 

If,  however,  the  investment  is  a  wasting  one,  such  as  mining  stock,  unless  the  life  tenant  is  expressly 
given  the  full  income  by  the  settlement,  he  is  entitled  to  receive  only  the  current  rate  of  interest  on  the  in- 
ventory or  cost  value  of  the  investment,  and  the  balance  will  be  applied  to  reduce  the  valuation 

"When  the  excess  of  dividends  has  entirely  wiped  out  the  cost  of  the  investment, 

all  the  dividends  will  go  to  principal." — Loring. 

EXTRA  DIVIDENDS :  The  rule  adopted  by  the  Supreme  Court  of  the  United  States  arid  by  the 
courts  of  a  number  of  the  states,  including  Massachusetts,  is  "to  regard  cash  dividends  however  large  as 
income,  and  stocks  dividends,  however  made,  as  capital." 

"A  cash  dividend  though  paid  from  earnings  accumulated  before  the  beginning  of  the  trust  has  been 
held  to  be  income." 

The  action  of  the  directors  as  expressed  by  their  vote  would  determine  in  the  case  of  dividends  in  li- 
quidation.   If  no  appointment  is  made  by  them  the  whole  amount  distributed  will  be  principal. 

RIGHTS :  "The  right  to  subscribe  for  new  stock  whether  availed  of  or  sold  for  cash,  is  generally 
held  in  all  jurisdictions,  irrespective  of  rules  governing  extra  dividends,  to  be  principal." — Loring. 

65 


DELAYED  DIVIDENDS :  When  the  dividends  are  cumulative,  and  fall  in  arrears  before  the 
trust  is  created  and  are  paid  in  full  after  the  creation  of  the  trust,  held  that  they  should  be  apportioned. 

INTEREST :     The  general  rule  is  that  the  whole  amount  received  as  interest  is  income. 

In  most  states,  if  a  bond  is  purchased  at  a  premium,  sufficient  of  the  interest  must  be  set  aside  yearly 
to  wipe  out  the  premium  at  maturity. 

"Interest  accrued  from  day  to  day,  and  will  therefore  be  apportioned  upon  a  sale  of  the  security  on 
which  it  accrues,  or  upon  the  termination  of  the  life  estate,  the  interest  accruing  up  to  the  date  of  sale  or 
death  being  income,  and  the  balance,  principal.  But  where  the  interest  is  payable  by  a  coupon,  which  may 
be  detached  and  sold  separately,  the  rule  in  the  absence  of  statute,  is  otherwise,  and  there  is  no  apportion- 
ment.   But  when  the  statute  exists,  even  coupons  are  apportioned." — Loring. 

DISCHARGE  OF  ENCUMBRANCE:  If  there  is  a  mortgage  on  the  estate,  if  at  once  discharged, 
it  is  paid  out  of  principal,  but  if  carried,  the  interest  is  chargeable  to  income. 

"If  the  trustees  are  called  upon  to  discharge  an  involuntary  encumbrance,  such  as  a  betterment  assess- 
ment or  judgment,  the  cost  is  apportioned." 

ALTERATIONS  AND  REPAIRS :  "Alterations  or  additions  to  real  estate  whereby  the  usefulness 
or  rental  value  is  increased  are  chargeable  to  principal,  but  the  repairs  or  expenditures  which  are  necessary 
to  maintain  the  property  in  its  previous  condition  are  chargeable  to  income." 

If  an  expenditure  is  in  the  nature  of  both  a  betterment  and  a  repair,  it  is  apportioned. 

All  expenditures  on  newly  acquired  property  which  are  necessary  to  make  it  tenantable,  are  chargeable 
to  principal. 

TAXES :  "All  annual  taxes,  except  those  assessed  on  vacant  land,  are  chargeable  to  income.  The 
whole  tax  for  the  year  is  chargeable  to  the  tenant  enjoying  the  property  at  the  time  the  tax  was  assessed." 

"Special  assessments,  such  as  betterment  assessments,  sewer  taxes,  etc.,  are  chargeable  to  principal  or 
are  apportioned." — Loring. 

INSURANCE:  "Insurance  premiums  are  expressly  chargeable  to  income  by  the  terms  of  most  care- 
fully drawn  trust  instruments,  and  where  no  express  provision  is  made  in  the  instrument  the  general  practice 
is  to  charge  them  to  income." 

"In  the  case  of  a  partial  loss  the  funds  recovered  would  be  used  in  repairing.  In  the  case  of  a  total 
loss,  the  fund  should  be  invested  or  could  be  used  for  rebuilding." 

"If  the  life  tenant  insures  the  property,  the  remainderman  has  no  claim  on  the  fund  recovered." — 
Loring. 

Insurance  received  in  excess  of  fire  damage  belong  to  principal. 

EXPENSES :  All  ordinary  current  expenses  are  chargeable  to  income.  This  includes  the  charges  of 
the  trustee  for  managing  the  property  by  way  of  a  commission  on  income.  Extra  charges  beneficial  to  the 
estate  are  chargeable  to  principal  or  may  be  apportioned. 

Broker's  commissions  for  changes  of  investments  are  in  practice  chargeable  to  principal. 

COMPENSATION  OF  EXECUTORS  AND  TRUSTEES 

Newhall  says,  "The  law  regarding  compensation  differs  in  the  several  states.  In  some  states,  a  fixed 
commission  is  allowed  and  in  others  the  compensation  depends  upon  the  discretion  of  the  court.  In 
Massachusetts  the  trustee  is  entitled  to  reasonable  compensation.  The  general  rule  is  5  per  cent,  of  the 
gross  income Usually,  there  is  also  a  special  commission  for  the  final  distribu- 
tion by  the  trustee,  if  he  makes  one.  Ordinarily,  this  is  fixed  at  2l/2  per  cent,  of  the  assets  distributed." 
No  general  rule  can  be  given  regarding  the  compensation  allowed  executors  and  administrators  by  Mass- 
achusetts courts.  Much  depends  upon  the  size  of  the  estate,  and  the  work  involved  in  its  settlement.  The 
court  will  always  allow  a  reasonable  compensation  based  upon  a  consideration  of  all  the  factors  involved. 

In  the  state  of  New  York,  commission  allowed  is  computed  on  the  amount  of  money  handled,  the  rate 
of  commissfon  being  as  follows:  > 

5     %  on  a  sum  not  exceeding  $1,000 
2y2%    "    "      "       "  "  10,000 

1     %  on  the  remainder. 


66 


CONTENTS   OF  SCHEDULES   CONTAINED   IN  TRUSTEES  ACCOUNT 

Schedule  A: 

Amount  of  personal  property  according  to  inventory,  or 

Balance  of  principal,  according  to  next  prior  account. 

Amounts  received  on  account  of  principal,  gain  on  sale  of  personal  property,  and  from  other  property. 

Schedule  B: 

Sundry  payments  and  charges  on  account  of  principal. 

Schedule  C: 

Balance  of  Principal. 

Schedule  D: 

Amounts  received  on  account  of  income. 

Schedule  E: 

Sundry  payments  and  charges  on  account  of  income. 

Schedule  F: 

Changes  of  investments.     (Not  usually  made  out,  such  changes  being  shown  in  Schedules  A  and  B.) 

68.  (From   Massachusetts  C.   P.  A.   Examination,  April,  1911.) 

January  1,  1908,  a  trustee  under  a  will  holds  100  shares  of  J.  K.  Co.,  the  inventory  value  of  which  is 
$13,000.  The  par  value  is  $100  per  share.  The  total  capital  stock  of  J.  K.  Co.  is  $600,000.  April  1,  1908,  the 
R.  S.  Co.  is  organized  with  $1,200,000  capital  stock;  par  value  of  shares,  $100,  and  at  that  date,  J.  K.  Co. 
transfers  certain  of  its  assets  to  R.  S.  Co.,  receiving  in  payment,  therefor,  all  of  the  latter's  capital  stock, 
which  J.  K.  Co.  distributes  pro  rata,  to  its  stockholders  and  proceeds  to  liquidate  its  remaining  assets  and  its 
debts;  paying,  December  1,  1908,  in  cash  to  its  stockholders  a  dividend  of  150  per  cent,  in  final  liquidation. 
The  trustee  sells  all  of  his  R.  S.  Co.  stock,  December  31,  1908,  at  $210  per  share.  Write,  with  full  explana- 
tion, (a)  :  entries  that  should  be  made  in  the  books  of  the  trustee,  including  the  ledger  account  for  the 
original  stock,  and  (b)  :  the  entries  to  be  made  in  the  trustee's  account  to  the  probate  court,  for  the  receipt 
of  the  R.  S.  Co.  stock  and  the  cash. 

69.  (From  Massachusetts  C.  P.  A.  Examination,  April,  1911.) 

Before  closing,  at  the  end  of  a  three  months'  period,  the  books  of  a  Trust  Estate  show  the  following 
balances : 

Real  Estate $3.96,868.39         Capital $523,691.06 

Running  expenses,  real  estate 1,507.02         Insurance    received    in   excess   of    fire 

Investments    123,010.11            damage    212.70 

General  expenses 527.51         General  income,  balance  at  beginning  of 

Cash  ( Principal) 4,450.26            period    2,037.52 

Cash  ( Income)    11,423.02         Income,  real  estate 6,748.65 

Income,  from  investments 4,002.53 

X,  Trustee  135.02 

Y,  Trustee  270.04 

Z,  Trustee 270.04 

Sale  of  "rights" $125.00 

Less  brokerage 6.25 

118.75 

Loans  payable  300.00 


$537,786.31  $537,786.31 

Separate  the  above  accounts  into  two  trial  balances  showing  Principal  and  Income.  Close  "Sale  of 
Rights"  account,  and  if  you  observe  any  discrepancy  in  the  cash  correct  it. 

The  trustees  are  to  receive  5  per  cent,  on  the  gross  income  for  the  period  as  compensation.  This  is  to  be 
divided  among  them  so  that  Y  and  Z  each  get  twice  as  much  as  X.     Pay  the  loan  of  $300.00.     Pay  the 

67 


trustees  the  amount  due  them.  Purchase  20  shares  of  N.  Y.  C.  stock  at  107^  (brokerage  34)  and  close 
the  books,  showing  the  Income  divisible  among  the  beneficiaries.  (Give  necessary  cash  book  and  journal 
entries,  also  balance  sheet  after  closing.) 

70.     (From  Massachusetts  C.  P.  A.  Examination,  June,  1912.) 

The  books  of  a  trustee  under  a  will,  show  the  following  condition  April  1,  1909 : 

Assets  Liabilities 

Cash $3,000        Principal $56,000 

Bonds :  A.  B.  Co.  $10,000  4s,  July  1,  1915 . .  9,000 

Stock :  D.  E.  Co.,  200  shares 24,000 

Stores,  157  K  St 20,000 


$56,000  $56,000 

Following  is  the  trustee's 

Cash  Account,  April  1,  1909,  to  March  31,  1910 : 

Receipts  Payments 

1909  1909 

Apr.     1  Balance $3,000  Apr.    10  Repairs,  store  $150 

4  Rent,  store  500  12  Insurance,  store   125 

July      1  Interest,  A.  B.  Co 200  June      1  Bonds,  J.  K.  Co.,  $2,000  6s,  April 

1  "         on  bank  deposit 8                               1/40   2,400 

3  Rent,  store 500  Brokerage  thereon 5 

31  Dividend,  D.  E.  Co 600  Accrued  interest  thereon 20 

Oct.      1  Interest,  J.  K.  Co 60        Aug.   15  J.  Doe,  a/c  income. . ...  1,250 

4  Rent,  store 500         Oct.    20  Repairs,  store    375 

1910  Nov.     1  Taxes,   store    300 

Jan.      1  Interest,  A.  B.  Co 200  1910 

2  Rent,  store 500        Jan.    20  Brokerage,  for  sale  of  store 540 

16  Sale  of  store $27,000  Feb.   15  J.  Doe,  a/c  income 1,250 

Less  purchase-money  mortgage  J.  15  Stock,  X.  Z.  Co.,  304  sh.  pref'd. .      33,440 

Smith,  Jan.  16,  1910,  5  years.    In-  Brokerage  thereon 38 

terest   5%    per   annum,   payable 

semi-annually    5,000 

22,000 

Jan.    31  Dividend,  D.  E.  Co 600 

Feb.    12  Sale  100  shares  D.  E.  Co 12,900 

Mar.     2  Dividend,  X.  Z.  Co 912 

3  Sale  of  "rights"  D.  E.  Co 100 

J.  Doe  is  the  life  tenant.  Pay  the  trustee  5  per  cent,  of  gross  income ;  pay  J.  Doe  the  balance  of  income 
and  prepare  the  necessary  schedule  for  the  trustee's  account  to  a  Massachusetts  probate  court  for  the 
period  beginning  April  1,  1909,  and  ending  March  31,  1910. 

71.  (From   Massachusetts  C.   P.  A.   Examination,  June,  1913.) 

In  the  Inventory  of  an  executor,  there  is  an  item,  No.  6 :  100  Shares  Utility  Co.  at  100,  $10,000. 

The  executor  sells  80  of  these  shares  at  150  flat. 

State  how  the  transaction  should  appear  in  his  probate  account. 

72.  (From  Massachusetts  C.  P.  A.  Examination,  October,  1914.) 

The  Beneficiary  of  a  Trust  (Massachusetts  Probate)  dies  July  6,  1913,  and  the  Trust  was  determined. 
Taxes  on  the  property  are  assessed  as  of  April  1,  1913,  payable  October  1,  1913. 
State  the  liability  for  taxes  as  between  the  Beneficiary  and  the  Remainderman. 

73.  (From  Massachusetts  C.  P.  A.  Examination,  October,  1914.) 

A.  B.  Jones  died  April  15,  1912,  leaving  one-half  of  the  property  to  his  wife  outright ;  the  balance  to 
be  held  in  trust,  the  income  of  which  was  to  go  to  his  wife  during  her  lifetime,  and  at  her  death  the  prin- 
cipal to  go  to  Technology. 

68 


The  estate  was  appraised  as  follows : 

1,000  Shares  Pullman  Co $160,000 

1,000       "         General  Electric  Co ' 166,000 

2,000       "         Penn.  R.  R.— Par  $50 123,000 

4,000      "        United  Shoe,  Com.— Par  $25 196,000 

Deposits  in  Banks 20,200 

Money  in  the  house 800 


Rate 
2 
2 
2 


$666,000 
Dividends  had  been  declared  as  follows : 

Date  of  Stock 

Stock  Declaration  of  Record 

Pullman  March  15  April       1 

General  Electric  "        15  March  31 

United  Shoe  "       21  April      1 

From  April  15,  1912,  to  April  15,  1913,  the  cash  receipts  were : 

Pullman  Co.    4  quarterly  div $8,000 

General  Elec.  4        "         "    8,000 

Penna.R.R.4         "          "    6,000 

United  Shoe  4        "         "    8,000 

Interest  on  Bank  Balances 300 

$30,300 
And  the  disbursements  for  the  same  period  were: 

Debts  of  Testator $4,500 

Expenses  of  funeral  and  last  sickness 1,500 

Income  to  widow 20,000 


Payable 
April  16 

"       20 
"       20 


$26,000 

The  executor  figured  his  commission  at  5  per  cent,  of  the  income  and  2l/2  per  cent,  of  the  principal,  and 
drew  a  check  for  the  amount.  He  paid  the  widow  the  balance  of  income  on  April  15,  1913,  and  distributed 
the  Principal  in  equal  shares,  at  the  appraised  value,  between  the  widow  and  the  Trust  Fund. 

a.  State  how  much  the  Executor  received  for  commission. 

b.  State  how  much  the  widow  received  as  balance  of  income. 

c.  State  how  much  cash  was  paid  into  the  Trust  fund. 

74.     (From  New  York  C.  P.  A.  Examination,  June,  1903.) 

John  Doe  died  January  15,  1901,  leaving  a  small  estate,  and  in  his  will  made  Richard  Roe  his  executor. 
The  will  provided  that  a  legacy  of  $5,000  should  be  paid  to  Mary  Doe,  sister  of  the  testator,  and  that  the 
residuary  estate  should  go  to  the  testator's  wife  and  two  daughters,  share  and  share  alike. 

The  estate  consisted  of  the  following: 

Cash  in  the  Dime  Savings  Bank $348.50 

One  month's  salary  (due  the  testator  from  his  employer)   250.00 

10  Union  Pacific  R.  R.  Co.'s  first  mortgage  5  per  cent,  gold  bonds  of  $1,000 

each  10,000.00 

One  first  income  bond,  Central  R.  R.  of  Georgia 1,000.00 

Demand  note  of  John  Smith 100.00 

At  his  death  the  testator  owed  two  month's  rent $50.00 

Acker,  Merrall  &  Condit,  household  supplies    $81.50 

The  appraiser  appointed  by  the  Surrogate  inventoried  all  securities  and  accounts  due  the  estate  at  their 
face  value. 

The  executor  received  $348.50  from  the  Dime  Savings  Bank,  with  $14.25  interest.  He  sold  the  Union 
Pacific  bonds  at  102  and  two  months'  interest,  the  Central  of  Georgia  income  bond  for  $875  flat,  and  paid 
If.  J.  Senior,  undertaker,  $541  for  funeral  expenses;  Arnold,  Constable  &  Co.  $185  for  mourning  apparel 

69 


of  widow  and  children.  He  also  paid  for  legal  and  other  expenses  incidental  to  the  probating  of  the  will, 
$125.  John  Smith  was  bankrupt,  and  his  note  proved  to  be  worthless.  The  executor  deducted  his  com- 
mission and  distributed  the  funds  of  the  estate  according  to  the  terms  of  the  will. 

From  the  above  statement  of  facts  prepare  (a)  the  executor's  inventory  of  the  estate  (b),  the  execu- 
tor's summary  statement  and  schedule  for  presentation  to  the  surrogate's  court  in  final  accounting  (c),  a 
statement  of  the  account  of  commissions  to  which  the  executor  was  entitled  (d),  a  statement  of  the  amounts 
paid  to  each  beneficiary. 

75.     (From  New  York  C.  P.  A.  Examination,  June,  1911.) 

Philip  Jones,  a  citizen  of  New  York  State,  died  April  1,  1909,  leaving  a  will  appointing  four  ex- 
ecutors.   The  will  was  probated  May  1,  1909,  showing  the  following  bequests : 

X  1/3  share,  B  1/4,  C  5/12  of  the  entire  estate  after  payment  of  funeral  expenses,  debts,  etc. ;  a 
specific  bequest  to  the  A  Hospital  consisting  of  $20,000  and  a  parcel  of  improved  property  valued  at 
$50,000. 

The  inventory  filed  by  his  executors  was  as  follows:  5%  mortgage  for  $40,000,  interest  payable  semi- 
annually on  June  30  and  December  31 ;  500  shares  common  stock  of  Industrial  Company,  par  value  $100, 
appraised  at  110;  50 — 5%  first  mortgage  bonds  of  A  Railway  Company,  par  value  $100,  appraised  at  104,  in- 
terest payable  semi-annually  on  March  1  and  September  1 ;  accounts  receivable,  valued  at  $20,000 ;  cash  in 
banks  and  on  hand,  $69,250 ;  household  furniture  and  effects  appraised  at  $5,500. 

The  executor's  transactions  were  as  follows : 

Cash  Receipts 

500  shares  of  Industrial  stock  sold  at  $115  per  share. 

45  first  mortgage  bonds  sold  July  1  at  $111  and  accrued  interest. 

Accounts  collected,  $18,500  (balance  worthless). 

6%  dividend  on  Industrial  stock  declared  May  1,  1909. 

Interest  on  bank  balances  $1,300,  of  which  $400  accrued  prior  to  testator's  death. 

Interest  on  bonds  and  also  on  mortgage  duly  collected. 

Rents  collected  $4,000,  of  which  $1,500  accrued  prior  to  death  of  testator. 

The  household  furniture  and  effects  were  taken  by  X  at  the  appraised  valuation. 

Cash  Payments 

Funeral  expenses $2,000 

Expenses  of  probating  will 335 

General  legal  services 1,000 

Rent  of  safe  deposit  vault 50 

Care  of  cemetery  lot,  etc 500 

Premium  on  executors'  bonds 100 

Stationery,  postage,  etc J125 

Debts  of  deceased 12,865 

Taxes 1,025 

X  on  account  of  legacy 12,000 

C  on  account  of  legacy 20,000 

The  inventory  on  December  31,  1909,  the  date  on  which  the  executors  wish  to  render  an  accounting, 
is  as  follows: 

5%  mortgage,  $40,000. 

Five  5%  first  mortgage  bonds  of  A  Railway  Company. 

Interest  on  X's  advances  amounts  to  $350  and  on  C's  advances  $575. 

Prepare  (a)  a  summary  statement  separating  principal  and  income  (b),  a  statement  showing  amounts 
due  beneficiaries  (c),  a  statement  showing  the  commission  due  executors. 

76.     (From  New  York  C.  P.  A.  Examination,  January,  1906.) 

Fredericka  Ward  dies  leaving  one  daughter,  Doris,  and  two  sons,  Henry  and  Arthur,  all  of  age,  surviv- 
ing her.  Her  will  directs  that  after  the  discharge  of  all  just  claims  on  her  estate  there  shall  be  placed  in 
trust  for  Fredericka  Winter,  the  child  of  her  deceased  sister,  $50,000,  the  income  of  which  is  to  be  used  for 

70 


the  child's  support  by  the  guardian  appointed  under  the  trust,  and  the  principal  to  be  paid  over  to  her  when 
she  becomes  of  age.    The  remainder  of  the  estate  is  to  be  divided  equally  among  the  testator's  three  children. 

The  estate  consists  of  cash  in  a  trust  company,  $12,500;  bonds  and  mortgages  on  real  estate,  $250,000; 
registered  municipal  bonds,  $90,000 ;  household  furniture  appraised  at  $20,130 ;  horses  and  carriages  ap- 
praised at  $3,000;  clothing  appraised  at  $2,000,  and  jewelry  appraised  at  $7,400. 

One  of  the  aforesaid  mortgages,  $50,000  at  5%,  is  in  arrears  of  interest  for  one  year,  and  foreclosure 
proceedings  are  commenced  by  the  executor,  with  the  result  that  on  an  immediate  settlement  the  estate 
realizes  the  principal  and  the  interest  so  in  arrears  and  the  trust  fund  is  paid  over  to  the  guardian  of 
Fredericka  Winter.  The  February  and  August  semi-annual  instalments  of  interest  at  5%  on  the  two  re- 
maining mortgages  of  $100,000  each  and  the  January  and  July  interest  on  the  registered  4%  bonds  are  all 
duly  received,  and  the  bonds  are  forthwith  sold  for  $90,190.  The  executor  then  pays  $30,000  to  Doris,  and 
$10,000  each  to  Henry  and  Walter  respectively,  on  account  of  their  interests.  Doris  takes,  as  part  of  her 
legacy,  household  furniture,  $5,000 ;  clothing,  $900,  and  all  the  jewelry  at  the  appraised  valuation.  Each  of 
the  sons  takes  as  part  of  his  legacy  one  of  the  remaining  bonds  and  mortgages. 

On  the  sale  of  the  remaining  effects  the  furniture  realizes  $15,000,  the  clothing  $1,000  and  the  horses 
and  carriages  $3,200.  There  is  also  received  from  the  trust  company  for  interest  on  deposit,  $350.  The 
executor  expended  for  probate  $150,  funeral  $600,  monument  $1,000,  tax  on  personal  estate  $350,  counsel 
fees  $1,500,  fire  insurance  $32  and  sundry  claims  against  the  estate  $7,201.  The  allowance  for  executor's 
fees  was  fixed  by  the  will  at  $2,500. 

Prepare  a  summary  accounting  showing  the  cash  in  hands  of  executor  and  the  amount  payable  to 
each  of  the  heirs. 


71 


PART  VII 

BRANCH  HOUSES,  SELLING  AGENCIES  AND 
CONSIGNMENTS 

77.     (From  Massachusetts  C.  P.  A.  Examination,  June,  1912.) 

A  manufacturing  concern  having  a  branch  in  another  town  presents  the  following  trial  balances  on 
January  1,  1912 : 

Main  Office 


Plant $125,500 

Material  and  supplies  (inventory  Jan.  1, 

1911) 68,300 

Purchases 245,800 

Labor 163,400 

General  expense 24,900 

Insurance  (1  yr.  to  Jan.  1,  1912) 3,400 

Accounts  receivable  (worth  95%) 84,600 

Cash 4,870 

Dividends  paid 20,000 

Branch 93,980 


Capital  stock $250,000 

Notes  payable 30,000 

Accounts  payable 42,630 

Net  sales 480,300 

Profit  and  loss  (Jan.  1,  1911) 31,820 


$834,750 


$834,750 


Plant    

Material  and  supplies  (inventory  Jan.  1, 

1911)  

Purchases  

Labor  

Insurance  (1  yr.  to  April  1,  1912) 

General  expense 

Accounts  receivable  (worth  100%) 

Cash 


Branch 
$35,200 


Net  sales  . . 
Main  office 


16,500 

62,450 

40,610 

1,260 

7,820 

24,600 

3,160 


$191,600 


$97,620 
93,980 


$191,600 


Inventories  of  material  and  supplies  on  January  1,  1912,  were :  main  office,  $45,300 ;  branch,  $28,400. 

No  inventories  of  finished  goods,  as  same  were  sold  on  contract  for  daily  shipments,  and  are  all  billed 
up  on  closing. 

In  closing  on  January  1,  1911,  the  branch  charged  off  all  insurance. 

General  Expense  includes  salaries,  office  expense,  taxes,  etc. 

Selling  Expense  has  been  deducted  from  the  sales. 

Construct  one  working  account,  profit  and  loss  account  and  closing  balance  sheet  for  the  entire  concern, 
omitting  estimate  for  depreciation. 

78.     (From  Massachusetts  C.  P.  A.  Examination,  June,  1912.) 

A  commission  house,  composed  of  three  partners,  is  selling  agent  for  sundry  consignors  whose  accounts 
are  unguaranteed.  The  rate  of  commission  is  3%  of  the  net  sales.  The  fiscal  terms  end  June  30  and 
December  31.  The  partners'  capital  accounts  are  to  be  credited  with  interest  at  6%  p.  an.,  and  with  the 
net  earnings  which  are  to  be  apportioned  as  follows: 


72 


J.  Doe,  60% ;  R.  Roe,  30%  ;  J.  Smith,  10%.  No  interest  is  to  be  computed  on  J.  Doe's  drawing  ac- 
count ;  that  account  is  to  be  credited  with  1%  of  the  net  sales.  Following  is  the  trial  balance,  December 
31,  1910: 


Cash 

Advances  to  sundry  consignors,  account 

of  sales 

Accounts    receivable     for    account    of 

sundry  consignors 

J.  Doe  drawing  acct 

Salaries 

Rents 

Traveling   

Teaming   

Miscellaneous  expenses 


$16,800 

105,700 

235,600 
5,800 
3,400 
700 
600 
200 
800 


Sundry  creditors 

Sundry  consignors'  sales  accounts 

J.  Doe  capital  acct.  (June  30,  1910).  .. 

R.  Roe  capital  acct.  (June  30,  1910) 

J.  Smith  capital  asst.  (June  30,  1910)  . . . 

Commissions 

Interest  received  from  consignors,  on  ad- 
vances account  of  sales  (to  Dec.  31, 
1910)  


$100 

235,600 

100,000 

9,000 

4,000 

18,000 


2,900 


$369,600 
The  net  sales,  during  the  six  months,  were  $600,000. 


$369,600 
Write,  in  proper  form,  a  statement  for  the  six 


months  ended  December  31,  1910,  showing  the  detail  of  gross  earnings;  expenses;  total  interest  credited 
to  the  partners;  net  earnings;  and  the  distribution  of  the  latter.    Show  a  balance  sheet,  December  31,  1910. 

79.     (From  Massachusetts  C.  P.  A.  Examination,  October,  1914.) 

The  condition  of  the  Atlantic  Co.  at  the  close  of  business  December  31,  1913,  is  reported  by  them  as 
follows : 

Assets 

Real  Estate $150,000.00 

Machinery 200,000.00 

Cash 24,500.40 

Accounts  Receivable 320,800.50 

Merchandise 375,480.70 

$1,070,781.60 
Liabilities 

Capital  Stock $500,000.00 

Mortgage  on  Real  Estate 100,000.00 

Accounts  Payable 67,000.00 

Notes  Payable 100,000.00 

Surplus  200,000.00 

Profit  and  Loss 103,781.60 


$1,070,781.60 
The  Company  has  a  branch  to  which  it  sells  its  goods  at  20%  over  inventory  prices  and  carries  this 
account  together  with  other  Branch  Assets  as  a  receivable. 

The  statement  of  tv»e  branch  on  same  date  was : 

Assets 

Fixtures    . .    $6,205.79 

ash 1,107.55 

Accounts  Receivable 12,478.14 

Merchandise  at  price  billed  to  Branch 5,241.95 

$25,033.43 
Liabilities 
Atlantic  Company $25,033.43 

a.  What  was  the  inventoried  value  of  the  Branch  Merchandise? 

b.  Prepare  a  corrected  statement  of  the  Atlantic  Company. 

73 


80.     (From  Massachusetts  C.  P.  A.  Examination,  October,  1914.) 

The  Peerless  Storage  Warehouse  Company  has  its  Treasurer's  office  in  Boston  and  Warehouse  in  a 
nearby  town.    The  Treasurer's  books  at  June  30,  1914,  show  the  following: 

Warehouse  Property $50,000.00 

Cash 98.05 

Prepaid  Interest 81.99 

Accrued  Interest  on  Investments 1,584.00 

Investments    48,803.64 

Due  from  Warehouse 643.80 

Capital  Stock 55,000.00 

Mortgage  Bonds 42,500.00 

Accrued  Interest  on  Bonds 850.00 

Reserve  for  Depreciation 497.24 

Surplus  2,364.24 

A  separate  set  of  books  at  the  Warehouse  show  the  following  accounts  and  balances  at  June  30,  1914: 

Cash $311.05 

Accounts  Receivable 543.27 

Accounts  Payable 10.52 

Due  to  Treasurer 843.80 

The  Treasurer  had  received  $200  in  payment  of  Accounts  Receivable  at  June  30,  1914,  which  was  cred- 
ited on  the  Treasurer's  books  to  the  account  with  the  Warehouse,  but  was  not  taken  up  on  the  Warehouse 
books  until  after  June  30. 

The  Y  Company  is  incorporated  on  March  31,  1914,  with  $100,000  Capital  Stock  and  acquires  control 
of  the  Peerless  Storage  Warehouse  Company  by  capital  stock  ownership.  It  issues  on  May  15,  1914,  $50,000 
(par  value)  First  Mortgage  5%  Bonds;  purchases  500  shares  of  the  Peerless  Storage  Warehouse  Company 
stock  (par  $100)  at  101,  owns  land  costing  $65,000,  purchases  $20,000  (par  value)  First  Mortgage  4% 
Bonds  due  1920  at  98*4,  has  cash  on  hand  $24,000,  and  a  balance  in  the  Profit  and  Loss  Account  of  $9,150. 
The  taxes  assessed  on  the  land  as  of  May  1,  1914,  for  the  following  year  were  $1,200  and  there  was  interest 
accrued  on  the  bonds  issued  from  May  15,  1914,  to  June  30,  1914. 

a.  Adjust  the  Warehouse  Company  books,  bringing  the  inter-office  account  with  the  Treasurer  in  agree- 
ment. 

b.  Prepare  a  Consolidated  Balance  Sheet  of  the  three  sets  of  books  at  June  30,  1914,  and  show  therein 
the  net  amount  of  capital  stock  of  each  company  in  the  hands  of  the  public. 

81.     (From  Massachusetts  C.  P.  A.  Examination,  June,  1910.) 

A  branch  office  business  was  started  at  the  first  of  the  year,  the  head  office  advancing  $5,000  cash. 
During  the  first  year  merchandise  was  shipped  to  branch  invoiced  at  $75,000. 

An  auditor  checking  up  the  business  at  the  close  of  the  year  finds  the  following : 

Merchandise  sales  were  $60,000  with  selling  price  of  goods  20  per  cent,  advance  on  invoice  cost. 

Proper  vouchers  were  on  file  duly  receipted  for  following  payments : 

Rebates  and  allowances  on  damaged  goods $1,500 

Salaries  and  other  expenses 4,500 

Freights 2,500 

The  books  also  showed : 

Remittances  to  head  office $35,000 

Uncollected  accounts 15,000 

The  balance  of  sales  having  been  realized  in  cash  less  rebates  and  allowances  as  noted. 

The  cash  on  hand  and  inventory  of  unsold  goods  together  with  the  foregoing  records  properly  account 
for  everything. 

Prepare  statement  such  as  an  auditor  would  make  in  reporting  to  the  head  office,  balancing  the  busi- 
ness of  the  branch  house. 

74 


82.     (From  New  York  C.  P.  A.  Examination,  June,  1914.) 

A  contracts  with  a  textile  establishment  to  sell  the  mill's  annual  output  on  the  following  conditions : 
The  mill  is  to  bill  the  output  to  A  at  cost.    A  is  to  finance  the  mill  to  the  extent  of  75%  of  cost  on  receipt 
of  goods.    The  balance  is  to  be  remitted  by  A  as  the  various  shipments  are  sold,  less  5%  and  advances.    At  the 
end  of  the  year  an  analysis  of  A's  affairs  reveals  the  following,  as  shown  by  his  books,  the  goods  being 
sold  at   10%   profit  above  factory  cost    (mill  shipments,  $7,327,918.18) : 

Debits  Credits 

Mill  advances   #5,545,938.00  $5,000,000.00 

Mill  sales 6,400,000.00  7,840,710.00 

Freight  and  cartage 90,000.00  80,000.00 

Customers 7,840,710.00  7,632,200.00 

Cash 7,610,200.00  5,635,938.00 

Discounts    22,000.00                 

Commission    i320,000.00 

Mill  Account 1,000,000.00 


$27,508,848.00       $27,508,848.00 
Prepare  A's  financial  statement. 


75 


PART  VIII 
MANUFACTURING  AND  COST  ACCOUNTS 

83.     (From  Massachusetts  C.  P.  A.  Examination,  October,  1916.) 

The  net  debit  balances  of  the  operating  accounts  of  a  manufacturing  corporation  at  the  end  of  the  year 
1914,  before  closing  the  books,  were  as  follows : 

Materials $237,199.93 

Direct  Labor  127,716.95 

Indirect  Labor 54,366.32 

Supplies  17,287.79 

Repairs   59,700.36 

Power,  Heat  and  Light 62,911.41 

General  Factory  Expenses 38,559.79 

Administrative  Expenses 32,513.65 

Selling  Expenses 72,993.95 

The  inventories  December  31,  1914,  were  as  follows : 

Materials $53,589.66 

Supplies 2,935.16 

Direct  Labor  in  Process 6,582.16 

Materials  in  Process 10,352.70 

Burden  in  Process 11,847.89 

Finished  Stock 35,692.45 

The  purchases  and  expenses  during  the  year  1915  were  as  follows : 

Materials $287,691.09 

Direct  Labor  161,437.00 

Indirect  Labor 57,163.32 

Supplies 17,914.85 

Repairs   61,316.78 

Power,  Heat  and  Light 70,324.40 

General  Factory  Expenses 40,610.37 

Administrative  Expenses 33,922.36 

Selling  Expenses 81,536.27 

During  the  year  1915  the  overhead  (burden)  cost  of  goods  manufactured  was  figured  as  a  percentage 
of  direct  labor  based  on  the  1914  figures.  With  the  accounts  set  up  on  this  basis  the  inventories  December 
31,  1915,  were  as  follows: 

Materials $66,732.12 

Supplies 3,266.27 

Direct  Labor  in  Process ■    7,203.45 

Materials  in  Process 12,510.35 

Burden  in  Process 12,966.21 

Finished  Stock — Made  up  of : 

.  Material    $17,751.53 

Direct  Labor 8,593.55 

Burden 15,468.39 

$41,813.47 

The  net  sales  for  the  year  1915  were  $863,910.25. 

a.  Set  up  the  ledger  accounts  to  show  the  transactions  for  the  year  1915  before  closing  the  books,  and 
then  make  adjusting  and  closing  journal  entries. 

b.  Show  operating  statement  for  the  year  1915. 

76 


84.     (From  Massachusetts  C.  P.  A.  Examination,  Tune,  1910.) 

The  fiscal  year  of  a  Manufacturing  Company  ends  June  30,  1908,  and  the  bookkeeper  presents  a  state- 
ment to  the  Directors  made  up  in  the  following  form : 

Gross  Sales $285,000.00 

Increase  of  Inventory 15,000.00 

$300,000.00 

Cost  of  Sales : 

Operating  expenses,  material  and  supplies $257,000.00 

Plant  expense 12,000.00 

Freight  on  returned  goods 600.00 

Sundry  purchases  finished  goods 10,400.00 

280,000.00 

Manufacturing  Profit $20,000.00 

Other  Income : 

Miscellaneous  earnings $1,500.00 

Profit  on  contracts 6,500.00 

Discount  on  purchases 500.00 

8,500.00 

$28,500.00 

Less: 

Discount  on  sales $2,875.00 

Rebates  and  allowances 1,125.00 

4,000.00 

Net  Plant  Profit $24,500.00 

Less: 

General  expenses $5,500.00 

Interest  1,500.00 

7,000.00 

Net  Profit $17,500.00 

You  are  required  to  make  up  a  Profit  and  Loss  statement  in  regular  form,  showing  Purchases,  etc., 
and  using  such  of  the  above  figures  as  may  be  necessary,  together  with  these  following:  Inventory,  June 
30,  1907.  Material,  $115,000;  Supplies,  $35,000;  Finished  Goods,  $45,000.  Inventory,  June  30,  1908. 
Material,  $140,000 ;  Supplies,  $10,000 ;  Finished  Goods,  $60,000.  Material  used  in  factory  during  the  year, 
$75,000.  Wages,  $122,500.  Fuel,  $2,500.  Repairs  and  Renewals,  $2,000.  Other  operating  expenses, 
$55,000,  which  includes  $25,000  supplies  used. 

85.     (From  New  York  C.  P.  A.  Examination,  June,  1911.) 

The  cost  books  of  Factory  A,  the  product  of  which  is  charged  to  the  main  office  of  the  X.  Y.  Z.  Co.  at 
factory  cost,  show  the  following  facts  January  1,   1910: 

Cash  (imprest  fund),  $500;  raw  materials,  $17,688,51;  wages  unpaid  and  distributed,  $2,348.67;  goods 
in  process,  at  prime  cost,  $62,258.61,  plus  $11,352.75  for  general  expenses  and  $9,007.50  for  management 
charges;  finished  goods,  $45,290.20. 

The  invoices  for  purchases  of  raw  materials  for  the  year  amounted  to  $78,375.65;  wages  paid, 
$133,041.27;  management  charges,  $53,695;  factory  expenses,  $36,967.08.  The  cash  receipts  for  one  year's 
rent  of  loft  were  $1,200  and  for  11  months'  sale  of  power  $330,  the  twelfth  month  being  unpaid. 

The  raw  materials  consumed  during  the  period  amounted  to  $64,188.33;  management  charges  dis- 
tributed $55,761.90;  factory  expenses  distributed  to  costs  amounted  to  $43,033.23.  There  was  also  a  loss  on 
machinery  replacements  of  $107.50. 

The  finished  product  output  for  the  year  amounted  to  $324,583.43,  including  all  costs,  and  the  transfers 
to  the  main  office  were  $338,297.90. 

77 


At  the  close  of  the  period  December  31,  1910,  there  remained  unpaid  and  undistributed  to  goods  in 
process  the  regular  factory  payroll  for  three  days  amounting  to  $2,857.93  and  also  1,500  hours  of  opera- 
tives' overtime  at  an  average  rate  of  45  cents  per  hour,  payable  on.a  basis  of  2]/2  hours  overtime  as  the  equiva- 
lent of  3y2  hours  regular  time. 

Raise  all  the  ledger  accounts  affected  and  show  final  trial  balance. 

86.  (From  New  York  C.  P.  A.  Examination,  June,  1914.) 

On  January  1,  1914,  The  Arlington  Company's  records  show  the  following  conditions  of  its  accounts: 

Inventory  of  raw  materials,  $46,864.26 ;  accrued  factory  payroll,  applied  and  distributed,  $2,495.34; 
goods  in  process  at  prime  cost,  $191,665.32 ;  the  further  value  of  $24,111.51  for  the  factory  overhead,  also 
$36,224.76  to  cover  superintendence ;  finished  goods  in  stock  show  a  total  cost  of  $64,968.03. 

During  the  period  from  January  1  to  December  31,  1914,  purchases  of  raw  materials  amounted  to 
$241,249.35;  factory  payrolls,  $377,381.70;  superintendence,  $114,300;  factory  expenses,  including  wages  not 
applied  to  cost  accounts,  $74,538 ;  interest  paid  on  notes,  $3,600 ;  dividends  received,  $15,012. 

During  the  period  mentioned,  the  operations  in  the  factory  comprised :  Raw  materials  requisitioned  for 
consumption,  $239,461.02 ;  wages  applied  and  distributed  to  manufacturing  cost,  $360,751.20 ;  and  to  factory 
expenses,  $17,878.17,  included  in  the  sum  stated  in  the  paragraph  above. 

There  were  also  forwarded  from  the  factory  to  the  warehouse,  finished  goods  at  prime  cost,  covering 
materials,  $235,627.74,  and  labor,  $355,001.25.  The  cost  of  goods  sold  during  the  year  was  $755,849.70,  and 
the  proceeds  from  goods  sold,  $907,019.64. 

On  December  31,  1914,  the  goods  in  process  included,  in  addition  to  prime  cost,  factory  overhead 
amounting  to  $25,317.06,  and  superintendence,  $38,035.98,  and  accrued  factory  payroll,  applied  and  dis- 
tributed, amounting  to  $3,743.01. 

Show  the  cost  controlling  accounts  as  they  would  appear  in  the  general  ledger,  their  operation,  and  the 
resulting  net  profit. 

87.  (From  New  York  C.  P.  A.  Examination,  February,  1908.) 

The  bookkeeper  of  a  manufacturing  concern  could  produce  only  the  following  statement  from  its  records 
on  January  1,  1907  : 

Manufacturing  expenses  $4,622.89 

Capital  stock  10,000.00 

Plant  and  equipment 17,500.00 

Gross  sales 8,469.10 

First  mortgage  bonds,  (due  Dec.  31,  1907) 15,000.00 

Materials  and  supplies  (inventory) 4,289.34 

Notes  payable 5,000.00 

Accounts  receivable   5,423.23 

Accounts  payable 2,436.28 

Interest  on  bonds  (7  months) 393.75 

Interest  on  notes  and  accounts  payable 282.40 

Cash  832.14 

On  January  1,  1907,  the  management  changes,  and  you  are  later  retained  as  a  public  accountant  to 
conduct  an  examination  and  prepare  a  balance  sheet  as  of  January  1,  1908. 

You  find  that  during  the  preceding  year  the  directors  have  subscribed  in  cash  to  $7,500  additional 
capital  stock  and  have  retired  all  the  notes  and  old  accounts  payable,  and  that  no  interest  was  paid  on  these 
accounts  for  the  year.  You  also  find  that  the  plant  and  equipment  was  revalued  at  $15,000  and  5  per  cent, 
of  this  amount  was  charged  off  to  provide  for  depreciation,  while  an  additional  %l/2  per  cent,  was  ordered 
placed  in  Reserve  Account  to  cover  repairs  and  renewals,  the  entire  iy2  per  cent,  being  charged  direct  to 
Profit  and  Loss.  The  bond  outstanding  fell  due  on  December  31,  1907,  and  was  paid,  principal  and  interest, 
in  cash. 

An  inventory  of  materials  and  supplies  placed  their  value  at  $2,328.19,  the  practice  being  to  charge  all 
purchases  direct  to  Manufacturing  Expenses  and  to  credit  back  the  amount  of  the  inventory. 

The  accounts  payable  (all  for  material  and  non- interest  bearing)  amount  to  $546.28. 

Of  the  accounts  receivable  January  1,  1917,  $4,968.18  was  collected  and  the  balance  charged  off  as 
uncollectible. 

78 


In  addition  to  the  material  used  from  stock  during  the  year  and  the  amount  still  due  for  material 
purchased,  the  manufacturing  expenses  were  $3,720.5 2,  all  paid  in  cash,  the  total  manufacturing  expenses 
being  31  per  cent,  of  the  gross  sales  for  the  year  ending  January  1,  1908. 

Of  these  91.3  per  cent,  were  collected  in  cash  and  the  balance,  all  of  which  is  considered  good,  remains 
on  the  books  in  accounts  receivable. 

Produce  a  comparative  balance  sheet  of  January  1,  1908-1907,  and  state  the  amount  of  gross  sales  for 
the  year. 


79 


PART  IX 
FOREIGN    EXCHANGE 

Foreign  Exchange  is  a  system  by  which  international  debts  are  discharged.  These  debts,  as  is  the  case 
in  domestic  trade,  must  be  paid,  either  in  cash  or  in  some  form  equally  satisfactory  to  creditors.  Inter- 
national balances  are  often  settled  by  means  of  the  transportation  of  gold,  but  this  method  is  subject  to  the 
risk  of  loss  by  shipwreck,  loss  due  to  abrasion,  cost  of  transportation  and  the  charge  for  insurance;  to 
avoid  this  risk  and  expense,  the  method  of  settling  debts  between  nations  through  the  medium  of  commercial 
paper  is  of  principal  importance  in  the  study  of  Foreign  Exchange. 

Foreign  Exchange  transactions,  in  addition  to  the  shipment  of  gold  from  one  country  to  another,  would 
include  the  issuing  of  a  draft,  bill  of  exchange  or  money  order  payable  in  a  foreign  country ;  an  order 
either  written  or  cabled  authorizing  the  paying  of  a  sum  of  money  abroad;  a  bill  of  exchange  drawn  upon 
the  purchaser  of  goods  shipped  to  a  foreign  country ;  commercial  paper  drawn  in  a  foreign  country  payable 
in  this  country;  the  purchase  or  sale  of  gold  or  specie  of  other  countries;  letters  of  credit  and  travelers' 
cheques. 

A  BILL  OF  EXCHANGE  is  a  draft  drawn  in  one  country  and  payable  in  another.  When  a  bill  of 
exchange  is  drawn  against  a  shipment  of  goods,  the  bill  of  lading,  insurance  papers,  clearance  papers,  and 
certificates  covering  weighing  and  inspection  are  attached  to  the  bill  which  then  becomes  known  as  a 
DOCUMENTARY  BILL  OF  EXCHANGE;  if  it  is  a  transaction  of  which  these  papers  would  form 
no  part,  it  is  called  a  CLEAN  BILL  OF  EXCHANGE.  In  the  case  of  a  documentary  bill  the  drawee 
must  either  pay  the  draft  or  promise  to  do  so  by  accepting  it  in  the  usual  manner  before  he  can  get  possession 
of  the  documents  giving  title  to  the  goods. 

Frequently  bills  of  exchange  are  drawn  in  sets  of  two.  These  are  sent  by  different  mails  and  sometimes 
by  different  routes  in  order  to  reduce  the  risk  of  loss ;  when  one  is  paid  the  other  becomes  void. 

A  TRAVELERS'  CHEQUE  is  a  cheque  issued  for  a  fixed  amount  and  made  payable  in  the  currency 
of  the  foreign  country  or  countries  specified  on  the  cheque.  After  being  signed  and  countersigned  by  the 
holder  they  are  payable  to  order  without  discount  or  commission  by  a  large  list  of  foreign  banks  and 
bankers.    A  commission  of  usually  y2%  is  charged  by  the  bank  from  which  the  cheque  is  purchased. 

A  LETTER  OF  CREDIT  is  a  letter  issued  by  a  bank  or  banker  introducing  the  holder  to  the  foreign 
correspondents  of  the  bank  which  issued  it  and  requesting  such  banks  to  furnish  the  holder  with  such  funds 
as  he  may  require  up  to  the  aggregate  amount  named  in  the  letter.  A  commission  of  usually  1%  is  charged 
by  the  issuing  bank. 

A  CABLE  TRANSFER  is  a  cabled  order  to  pay  a  specified  sum  of  money  to  a  person  or  firm  in  a 
foreign  country.  The  rate  charged  is  the  current  rate  of  exchange  plus  a  commission  of  about  }i%  plus 
the  usual  cable  charges. 

The  PAR  OF  EXCHANGE  is  the  standard  value  of  the  gold  contained  in  the  monetary  unit  of  one 
country  expressed  in  terms  of  the  monetary  unit  of  another  country.  Example  1 :  $4.8665  which  is  the 
par  of  exchange  between  the  United  States  and  England. 

The  rates' of  exchange  fluctuate  by  certain  fixed  amounts  or  fractions  governed  by  the  relative  state  of 
indebtedness  on  one  country  to  another,  commonly  spoken  of  as  the  balance  of  trade;  by  the  supply  of  gold; 
by  the  degree  of  risk  incurred  in  transporting  gold,  etc. 

A  knowledge  of  the  monetary  systems  of  the  leading  commercial  countries  of  the  world  is  essential  to 
a  clear  understanding  of  the  theory  of  Foreign  Exchange  and  its  application  to  actual  transactions.     The 


80 


following  table  gives  the  monetary  unit  of  the  more  important  foreign  countries  and  their  equivalent  value 
in  United  States  money : 

Country  Unit  Value  in  U.  S.  Money 

Great  Britain  Pound  Sterling  4.8665 

German  Empire  Mark  .2380 

France  Franc  .1930 

Belgium  Franc  .1930 

Switzerland  Franc  .1930 

Italy  Lira  .1930 

Greece  Drachma  .1930 

Spain  Peseta  .1930 

Russia  Ruble  .5150 

Japan  Yen  .4980 

Mexico  Peso  .4980 

Brazil  Milreis  .5460 

Argentine  Republic  Peso  .9650 

Holland  Guilder  .4000 

Great  Britain  having  always  been  the  leader  amoisj  the  nations  in  world  trade,  London  has  become  the 
financial  center  of  the  world  and  exchange  on  London  is  an  acceptable  medium  of  circulation  in  most 
countries.    This  means  that  the  great  bulk  of  international  settlements  is  by  means  of  London  exchange. 

The  rate  of  exchange  on  London  under  normal  conditions  fluctuates  by  $.0005  or  multiples  thereof, 
due  to  a  combination  of  trade  conditions  including  the  corresponding  expense  of  transporting  gold. 

Exchange  on  France,  Belgium  and  Switzerland  is  quoted  by  giving  the  exchange  value  of  $1  in  francs. 
Thus  when  exchange  on  Paris  is  quoted  at  5.18  it  means  that  $1  will  buy  5.18  francs.  Exchange  on  Paris 
fluctuates  by  ^  of  a  centime  equal  to  %  of  one  cent.  These  rates  are  also  modified  for  greater  accuracy 
by  adding  or  subtracting  1/16,  1/32  or  1/64.  It  is  well  to  observe  that  contrary  to  other  quotations,  the 
greater  the  number  of  francs  that  can  be  bought  for  $1,  the  lower  the  rate,  since  the  more  francs  one 
could  buy  with  a  certain  amount  of  money. 

Exchange  on  Germany  is  quoted  by  giving  the  exchange  value  of  4  marks  in  cents.  When  exchange 
on  Berlin  is  quoted  at  96^,  four  marks  are  equal  to  96y2  cents. 

As  illustrating  the  decline  in  exchange  rates  due  to  the  European  war,  the  following  taken  from  the 
Boston  Transcript  of  March  7,  1916,  is  of  interest: 

"The  foreign  exchange  market  was  quiet  and  fairly  steady.    Rates  as  follows :  Sterling, 
Cables,  $4.76^4  ;  demand,  $4.76^.    Francs,  5.89  ;  marks,  7S}i  ;  guilders,  42^  ;  lira,  6.70." 

The  discount  rates  at  London,  Paris,  Berlin  and  other  European  centers  have  a  material  effect  upon 
exchange  rates  for  commercial  bills.  These  discount  rates  are  the  rate  per  cent  at  which  commercial  paper 
of  the  different  classes  may  be  discounted.  The  rates  fluctuate  according  to  the  trade  conditions  prevailing 
at  the  time. 

To  avoid  confusion  in  a  study  of  Foreign  Exchange  it  should  be  borne  in  mind  that  trade  between 
countries  is  conducted  in  a  manner  quite  similar  to  domestic  trade,  the  chief  differences  resulting  from 
greater  distance,  different  monetary  standards  and  the  commercial  customs  of  different  countries.  To  obtain 
payment  for  goods  shipped  to  a  foreign  country  which  perhaps  would  not  arrive  at  their  destination  for 
several  weeks,  it  is  the  usual  custom  of  the  shipper  to  draw  a  commercial  bill  of  exchange  against  the 
shipment  and  sell  it  at  the  best  rate  of  exchange  available. 

The  cost  of  exchange  is  from  an  accounting  standpoint  a  charge  against  profits;  the  usual  practice  is 
to  charge  the  cost  of  exchange  to  an  exchange,  or  a  Collection  and  Exchange  account.  Such  an  account 
would  show  cost  of  financing  the  purchase  or  sale  and  should  be  treated  the  same  as  domestic  rates  for 
collection  of  checks,  interest  and  discount. 

The  process  by  which  a  foreign  commercial  bill  of  exchange  is  drawn  against  commodities  exported, 
and  by  which  the  bill  is  handled  and  settled,  is  well  illustrated  by  an  actual  transaction  described  by  H.  K. 
Brooks  in  a  lecture  on  Foreign  Exchange: 

"A  certain  shipment  of  flour  made  by  a  leading  exporter  and  destined  to  Liverpool,  England,  was 
delivered  to  the  Soo  freight  line  at  Minneapolis,  operating  over  the  Minneapolis,  St.  Paul  &  Sault  Ste.  Marie 
and  Canadian  Pacific  Railroads,  a  through  bill  of  lading  in  duplicate  being  obtained.  Such  a  bill  of  lading 
is  issued  by  special  arrangements  with  connecting  ocean  steamship  lines  by  the  terms  of  which  it  is  agreed 
under  conditions  printed  thereon,  to  transport  to  its  destination.    It  states  the  number  of  packages,  how  they 

81 


are  marked,  their  contents,  the  particular  grade  or  brand  of  flour,  and  the  name  and  address  of  the  party  for 
whom  the  goods  are  intended.     It  is  negotiable  only  by  endorsement  of  the  exporter. 

"Upon  presentation  of  this  evidence  of  shipment,  a  marine  insurance  company  has  issued  a  certificate 
of  insurance,  under  the  terms  of  which  it  agrees  to  reimburse  the  owner  of  the  goods  in  case  of  the  loss  of 
the  shipment  by  fire  or  accident  while  en  route  on  the  ocean.  This  shipment,  as  is  the  usual  custom,  is 
for  about  10  per  cent  in  excess  of  its  billed  value. 

"The  exporter  then  attaches  to  these  documents  a  draft  for  the  amount  for  which  the  flour  was  sold, 
namely,  £457  12s.  lOd. 

"In  this  case  the  exporter  agreed  to  allow  the  buyer  sixty  days'  time  in  which  to  pay  the  draft,  after  its 
presentation.  The  draft  reads  '60  days  after  sight  of  this  first  of  exchange  (second  unpaid),  pay  to  the 
order  of  ourselves  457  pounds  12  shillings  and  10  pence,  against  Soo  line,  through  B.  L.  No.  B.  1548,  dated 
May  16,  1901,  for  2,000  sacks  of  flour  branded  Dakota,'  and  is  signed  Northwestern  Consolidated  Milling 
Co.,  by  H.  E.  Kent,  cashier,  who  are  termed  the  drawers.  In  the  left  corner  it  reads :  'To  James  Corwith 
&  Co.,  Liverpool,  Eng.'    They  are  the  buyers,  or,  as  we  term  them,  the  drawees. 

"Now,  these  three  documents,  drawn  to  the  order  of  the  exporters  (Northwestern  Consolidated  Milling 
Co.),  comprise  a  documentary  commercial  bill  of  exchange. 

"Upon  the  same  day  that  these  documents  were  issued,  and  practically  before  the  flour  has  started  on 
its  long  journey,  the  exporters  offered  this  bill  of  exchange  for  sale.  It  was  sold  to  the  Security  Bank  of 
Minneapolis  at  the  rate  of  $4.84  per  pound,  who  in  turn  resold  it  to  the  American  Express  Co.,  at  $4.84^ 
per  pound.    The  indorsements  on  the  back  of  the  draft  read: 

"Northwestern  Consolidated  Milling  Co.,  H.  E.  Kent,  Treasurer. 
"Security  Bank  of  Minnesota,  Thos.  F.  Hurley,  Cashier. 
"Pay  to  the  order  of  the  National  Provincial  Bank,  Liverpool. 
"American  Express  Co.,  by  Jas.  F.  Fargo,  Treasurer. 

"The  latter  indorsement  shows  the  papers  to  have  been  sent  to  Liverpool  for  collection.  The  bank  at 
Liverpool  notified  Corwith  &  Co.  to  call  and  accept  the  draft,  which  they  did,  by  writing  the  word  'accepted' 
and  the  date  over  their  signature. 

"About  fifteen  days  afterward  the  flour  arrived  by  slow  steamer,  and,  being  in  immediate  need  of  it, 
Corwith  &  Co.,  in  order  to  obtain  the  bill  of  lading,  had  to  pay  the  draft;  the  instructions  stamped  on  same 
being:   'Surrender  documents  upon  payment  only.' 

"Now,  as  Corwith  &  Co.  paid  this  draft  forty-five  days  before  it  was  due,  the  bank,  as  is  customary, 
allowed  them  the  prevailing  rate  of  discount  applicable  to  that  class  of  bills,  which  was  2  per  cent  (or 
£1  3s.  5d.).  The  difference,  £456  7s.  5d.,  less  cost  of  revenue  stamps,  was  placed  to  the  credit  of  the 
American  Express  Co.  by  the  bank  which  closed  the  transaction. 

"Had  the  instructions  on  draft  read  'Surrender  documents  upon  acceptance  of  draft,'  the  bill  of  lading 
would  have  been  delivered  when  draft  was  accepted,  thus  enabling  Corwith  &  Co.  to  obtain  goods  at  once 
and  pay  draft  sixty  days  afterward  if  they  desired. 

"The  method  used  in  determining  what  this  commercial  bill  was  worth  when  buying  it  here  was  based 
upon  the  following: 

1.  What  demand  exchange  upon  Liverpool  could  be  sold  for. 

2.  The  cost  of  revenue  stamps  to  be  affixed  when  draft  was  accepted  abroad. 

3.  The  interest  for  the  number  of  days  for  which  draft  was  drawn,  plus  three  days'  grace,  at  the 
rate  per  cent  bill  could  be  discounted. 

For  illustration : 

$4.8775         Demand  rate  on  Liverpool. 
•0.00244      Cost  of  revenue  stamp  (1/20  of  1  per  cent  of  rate  or  1  shilling  per  100  pounds). 


$4.87506 
0.01676       Interest  63  days  2  per  cent  (discount  rate). 


$4.85830       Parity  or  cost  per  pound  at  maturity  or  if  discounted. 
4.84125       Rate  per  pound,  at  which  purchased. 


$0.01705       Profit  per  pound. 

Or  $7.78  on  £457  12s.  10d.' 


82 


ARBITAGE  OF  EXCHANGE  or  "arbitage"  is  the  method  of  making  remittance  to  one  country 
through  the  medium  of  exchange  drawn  upon  another  country,  instead  of  making  the  remittance  direct. 
This  is  done  when  the  rate  of  exchange  here,  direct  upon  the  country  to  which  we  wish  to  remit,  is  higher 
than  if  we  were  to  buy  exchange  upon  a  third  country  through  some  bank  which  would  then  complete  the 
transaction  by  remitting  to  the  country  where  payment  is  to  be  made. 

Illustration :  Suppose  a  Boston  banker  wishes  to  remit  to  Paris  25,250  francs  and  the  best  rate  at  which 
same  could  be  bought  upon  the  market  was  5.17y2.  This  would  call  for  $4,879.23.  If  a  draft  on  London 
could  be  bought  at  $4.84  and  the  cable  reports  from  London  give  quotations  for  London  checks  on  Paris  at 
25.25  francs  per  pound  sterling,  for  1,000  pounds  a  check  for  25,250  francs,  payable  in  Paris,  could  be 
bought  in  London,  and  that  the  1,000  pounds  draft  on  London  could  be  bought  in  Boston  for  $4,840.  Thus 
by  remitting  to  Paris  through  London  we  would  save  the  difference  between  $4,879.23,  cost  of  draft  on 
Boston  or  Paris,  and  $4,840,  cost  of  draft  in  London  on  Paris,  or  $39.23. 

"A  CROSSED  STERLING  CHECK  is  one  payable  either  to  bearer  or  order,  having  the  name  of  a 
banker,   or  two   parallel   lines   and   the   abbreviation   '&  Co.'  written   or  printed  across  the   face,   thus: 

&  Co.  The  effect  is  to  direct  the  bank  upon  which  it  is  drawn  to  pay  the  check 
only  when  coming  to  it  through  some  other  bank.  It  is  intended  as  an  additional  safeguard  against  wrong 
payment. 

"In  most  foreign  countries  it  is  the  custom  of  bankers  and  others  in  the  cashing  of  checks,  whether 
drawn  payable  to  bearer  or  order,  to  pay  to  the  person  presenting  same,  and  under  the  laws  existing  in  these 
countries,  the  paying  bank  or  banker  would  not  be  held  liable  for  payment  to  the  wrong  party.  As  a  reason 
for  this  seemingly  risky  method,  it  is  claimed  that  on  account  of  the  very  severe  penalty  imposed  for  forgery 
under  their  laws,  the  requiring  of  strict  personal  identification,  as  exacted  by  banks  within  the  United  States, 
is  unnecessary. 

"As  a  precaution  against  wrong  payment,  however,  the  laws  of  Great  Britain  require  that  when  a  check 
is  crossed,  while  not  requiring  personal  identification,  it  must  be  cashed  through  some  bank  other  than  the 
one  on  which  it  was  drawn." — Brooks. 

88.  A  Boston  importer  buys  goods  from  a  Dresden  manufacturer  costing  21,320  marks.  The  importer 
buys  from  his  banker  a  bill  of  exchange  on  Berlin  at  95^.    Find  cost  of  the  bill  of  exchange. 

89.  Hubbard  &  Company  purchase  a  bill  of  exchange  on  London  at  sight  for  £342  12s.  6d.  at  $4.86J^. 
What  is  the  cost  of  the  bill  ? 

90.  Bryant  &  Company  purchase  a  bill  of  exchange  on  Paris  for  33,250  francs  for  $6,412.72.  What 
was  the  rate  of  exchange? 

91.  A  Liverpool  merchant  draws  a  bill  of  exchange  at  3  days  sight  on  a  Springfield,  Mass.,  merchant 
for  £450  10s.  6d.  The  draft  was  presented  by  a  local  bank  and  paid  by  check.  What  was  the  amount  of 
the  check,  exchange  being  at  4.85  J4  • 

92.  What  are  the  proceeds  of  a  documentary  bill  of  exchange  London  for  £528  8s.  6d.  at  60  days 
sight  if  sold  to  a  banker,  the  rate  of  exchange  being  4.77J4,  interest  4%,  revenue  stamp  1/20%  and 
commission  %%. 

93.  Tiffany  &  Company  import  an  invoice  of  statuettes  and  bronzes  from  Florence,  Italy,  amounting 
to  14,725.35  lira.  They  buy  a  3-day  sight  draft  of  Brown  Bros.  Company  on  a  Florence  banker  to  pay  the 
bill.  What  will  they  pay  for  the  draft  if  the  rate  of  exchange  is  5.17^2,  commission  %%,  revenue  stamp 
1/20%,  discount  rate  3%. 

94.  (From  New  York  C.  P.  A.  Examination,  June,  1914.) 

A  manufacturing  firm  imports  its  raw  material  and  purchases  exchange  on  Europe  in  payment.  How 
should  the  exchange  account  be  treated  with  respect  to  the  cost  of  production? 

95.  (From  New  York  C.  P.  A.  Examination,  January,  1914.) 

Explain  the  method  of  quoting  French  exchange  in  New  York,  also  the  following  phrase  used  in  a 
certain  work  on  foreign  exchange :  "The  higher  the  rate,  the  lower  the  quotation." 

83 


96.  (From  Massachusetts  C.  P.  A.  Examination,  October,  1915.) 

A  banking  concern  deals  in  foreign  exchange  and  the  following  are  the  transactions  with  a  London 
correspondent  for  one  month : 

Debits 

Sept.     1     Remittance,  thirty-day  bill  £400 @  4.86 

Sept.  10     Remittance,  sight  bill,  £100-10-0 @  4.87 

Sept.  15     Remittance,  demand  bill,  £200-0-6 @  4.8634 

Credits 

Sept.     2     Draft,  sight  £300  @  4.87*4 

Sept.  12     Draft,  demand  £200-12-5 @  4.87 

Sept.  20     Cable,  £100  @  4.88 

a.  Ascertain  the  profit  and  loss  in  the  account  for  the  month. 

b.  State  the  balance  of  the  account  at  the  end  of  the  month  in  foreign  and  domestic  currency,  the 
current  rate  of  sterling  exchange  being  cable  transfer  4.89. 

97.  (From  New  York  C.  P.  A.  Examination,  June,  1915.) 

A  New  York  corporation  builds  a  plant  and  establishes  a  branch  in  Liverpool,  England.     At  the 
expiration  of  its  fiscal  period  a  trial  balance  is  forwarded  to  the  New  York  office,  as  follows : 

Plant   £250,000 

Accounts  Receivable 187,500 

Expenses   25,000 

Inventory  (end  of  fiscal  period) , 50,000 

Remittance  Account 150,000 

Cash : 12,500 

Accounts  Payable £87,500 

Income  from  Sales 250,000 

New  York  Office 337,500 


£675,000  £675,000 

A  trial  balance  of  the  New  York  books  at  the  same  date  was  as  follows : 

Capital  Stock $2,500,000.00 

Patents $1,500,000.00 

London  Account 1,640,250.00 

Remittance  Account 729,281.25 

Expenses  at  New  York 25,000.00 

Cash  64,031.25 

$3,229,281.25      $3,229,281.25 

The  Remittance  account  is  composed  of  four  sixty  (60)  day  drafts  on  Liverpool  for  £37,500  each, 
which  were  sold  in  New  York  at  $4.85^,  $4.86,  $4.8634  and  $4.86^,  respectively. 

Prepare  a  balance  sheet  of  the  New  York  books  after  closing  and  a  statement  of  assets  and  liabilities  of 
the  Liverpool  branch  reconciled  with  the  New  York  books.  Close  the  books  at  rate  of  exchange  on  last 
day  of  fiscal  period  $4.87^4  (conversion  of  remittance  to  be  made  at  the  average  rate  of  the  four  bills). 

98.     (From  New  York  C.  P.  A.  Examination,  June,  1915.) 

A  in  London  in  current  account  with  B  of  New  York  engages  an  accountant  to  prepare  a  statement,  to 
be  mailed  to  B,  from  the  following  data : 

Debits 
1914 

May  12 £750 

May  30 117 

June  12 340 

July     1 150 

Total  Debits £1,357 

84 


Credits 

1914 

June  10 £500 

June  30 300 

Total  Credits 800 

Balance £557 

Find  the  average  due  date  of  the  account  and  the  interest  at  5%  to  July  1,  365  days  to  the  year. 

99.  (From  Illinois  C.  P.  A.  Examination,  May,  1914.) 

Mexican  exchange  has  fallen  considerably  during  the  recent  political  disturbance  in  the  Republic,  say 
from  50  pesos  to  the  U.  S.  dollar  to  about  35  pesos.  What  effect  has  this  on  the  accounts  of  an  American 
company,  with  its  head  office  in  Chicago,  doing  business  in  the  Republic  through  a  local  branch  office  ? 

Describe  fully,  also,  the  effect  of  this  fall  in  exchange  in  the  accounts  of  two  American  companies  with 
head  offices  in  the  United  States,  of  which  one  operates  a  gold  mine  in  Mexico,  shipping  all  its  product  to 
New  York  where  the  metal  is  sold,  and  the  other  operating  a  local  electric  light  and  power  plant  in  the 
Republic,  buying  all  its  materials  and  supplies  in  the  United  States ;  and  state  how  the  matter  should  be 
dealt  with  in  the  annual  accounts  of  the  respective  companies. 

100.  (From  New  York  C.  P.  A.  Examination,  January,  1914.) 

Wright,  Dunbar  &  Company,  of  New  York,  U.  S.  A.,  and  Van  Allen  &  Company,  of  Amsterdam, 
Holland,  bankers  and  dealers  in  foreign  exchange,  enter  into  a  joint  venture  on  January  2,  1914,  for  the 
purpose  of  dealing  in  foreign  exchange. 

It  is  agreed  that  profits  or  losses  are  to  be  shared  equally,  that  interest  on  the  account  current  is  to  be 
figured  at  6%  per  annum,  exact  number  of  days  per  month,  and  that  guilders  at  sight  are  to  be  calculated 
at  40 J4. 

The  blotter  of  the  New  York  bankers  records  the  following  completed  transactions  for  the  joint  venture 
of  the  first  month's  operations : 

January  10,  1914 

Received  on  a/c  from  Borton  Bros.,  New  York,  and  sent  to  Van  Allen  &  Company,  a/c  joint  venture, 
£2,000  on  London,  due  February  10,  1914,  at  4.87  sight  and  ±l/2%. 

January  16,  1914 

Received  from  Van  Allen  &  Company  value  January  2,  1914,  their  draft  on  Wiener  Bros.,  due  Feb- 
ruary 25,  1914,  kronen  48,000  on  Vienna  at  49^  guilders,  2  months,  discount  4%. 

January  16,  1914 

Cable  from  Van  Allen  &  Company  that  they  have  sold  for  account  joint  venture,  value  this  day,  £2,000 
on  London,  due  February  10,  1914,  at  12  guilders,  2  months,  discount  4%. 

January  16,  1914 

Discounted  this  day  at  National  City  Bank,  New  York,  for  a/c  joint  venture,  value  January  16,  1914, 
kronen  48,000  on  Vienna,  due  February  25,  1914,  at  20*4,  3  months,  discount  4%. 

January  27,  1914 

Received  from  Van  Allen  &  Company  value  January  13,  1914,  their  draft  on  Charles  &  Company,  in 
Berlin,  due  February  13,  1914,  Rm.  30,000  at  59  guilders,  2  months,  discount  5%. 

January  28,  1914 

Sold  for  cash  a/c  joint  venture,  value  this  day,  Rm.  30,000  on  Berlin,  due  February  13,  1914,  at  .95, 
3  months,  discount  5%. 

Prepare  as  at  January  31,  1914: 

a.  A  statement  showing  separately  the  results  of  operations  as  conducted  in  New  York  and  Amstep 
dam,  respectively. 

b.  The  ledger  accounts  of  the  joint  venture  and  of  Van  Allen  &  Company  as  kept  by  the  New  York 
firm  of  bankers. 

85 


PART  X 
EQUATION  OF  ACCOUNTS 

Equation  of  Accounts  is  the  process  of  finding  the  date  on  which  an  open  account  consisting  of  items 
falling  due  at  different  times  may  be  paid  without  loss  or  gain  to  either  debtor  or  creditor. 

While  the  subject  is  no  longer  of  great  practical  value  due  to  the  fact  that  terms  of  sale  are  much  more 
definitely  fixed  than  formerly,  payments  being  made  usually  in  accordance  with  the  terms  agreed  upon,  yet 
it  is  a  subject  with  which  all  accountants  should  be  familiar;  furthermore,  it  is  still  the  custom  of  certain 
wholesale  houses  and  manufacturers  to  equate  or  average  their  accounts. 

The  averaging  of  accounts  having  items  on  only  one  side  is  termed  simple  equation,  while  the  averaging 
of  accounts  containing  both  debit  and  credit  items  is  termed  compound  equation. 

Book  accounts  bear  legal  interest  after  coming  due  and  non-interest  bearing  notes  if  not  paid  at  maturity 
bear  interest  from  that  date.  The  theory  upon  which  equation  of  accounts  is  based  is  that  the  interest  on 
overdue  items  is  canceled  by  the  discount  on  payments  made  before  maturity. 

A  focal  date  is  any  assumed  date  of  settlement  with  which  the  dates  of  the  several  accounts  are 
compared  for  the  purpose  of  finding  the  average  due  date.  Any  date  may  be  used  as  the  focal  date, 
although  it  is  the  general  practice  to  use  the  latest  date  occurring  in  the  account.  Any  rate  of  interest  may 
likewise  be  used,  although  as  a  matter  of  convenience  6%  should  always  be  used. 

SIMPLE  EQUATION 

Problem  I 

Find  the  average  date  of  payment  of  the  following  items  appearing  on  the  books  of  Wood,  Campbell  & 
Co.  in  account  with  Sponcer  &  Co.  July  8,  To  Md'se.,  $600;  July  20,  To  Mdse.,  $1,200;  August  17,  To 
Mdse.,  $1,800. 

Solution 

Assume  August  17  as  the  focal  date. 

If  the  $600  is  not  paid  until  August  17  it  is  overdue  40  days,  the  interest  for  that  time  amounting  to 
$4.  If  the  $1,200  is  not  paid  until  August  17,  is  is  overdue  28  days,  the  interest  amounting  to  $5.60.  If  the 
$1,800  item  is  paid  on  the  assumed  due  date,  there  would  be  no  interest  charge.  If  the  total  amount  of  the 
bill,  $3,600,  is  paid  August  17,  Wood,  Campbell  &  Co.  would  lose  $9.60  interest.  To  avoid  this  loss  the 
account  should  have  been  settled  earlier. 

The  interest  on  $3,600  for  1  day  is  60  cents ;  hence,  if  the  payment  had  been  made  one  day  earlier,  the 
loss  would  have  been  60c  less.  Therefore,  the  account  should  have  been  settled  as  many  days  before 
August  17  as  60c  is  contained  times  in  $9.60,  or  16  days.  Counting  back  16  days  from  August  17  gives 
August  1,  the  equated  date.    Or  expressed  in  the  usual  form  as  follows : 

July     8 $600  40  days $4.00 

July  20 1,200  28  days 5.60 

August  17 1,800  0  days 0.00 


$3,600  $9.60 

Interest  on  $3,600  for  1  day  =  60c. 

$9.60  divided  by  60c  ==  16  days,  average  term  of  credit. 

August  17 — 16  days  =  August  1,  equated  date. 

From  the  foregoing  solution  the  following  rule  may  be  derived : 

Select  the  latest  date  as  the  focal  date. 

Find  exact  time  in  days  from  the  date  of  each  item  to  the  focal  date  and  compute  the  interest  on  each 
item  for  the  time  as  found.  If  a  term  of  credit  is  given,  add  the  term  of  credit  to  the  date  of  the  item  using 
the  maturity  date  in  finding  the  time. 

Divide  the  sum  of  the  interest  so  found,  by  the  interest  on  the  total  account  for  one  day,  the  quotient 
being  the  number  of  days  average  time. 

Count  back  from  the  focal  date  the  number  of  days  so  found  in  order  to  ascertain  the  equated  date. 

86 


COMPOUND  EQUATION 

Problem  II 

The  following  account  appears  on  the  books  of  R.  G.  Laird  &  Co. : 

J.  K.  Renshaw 

May  1     Mdse $1,840         May  10     Cash $600 

June  1     Mdse 1,200         May  20     Cash 900 

Solution 
Select  June  1  as  the  focal  date. 

Debits 

May  1 $1,840    31  days $9,506 

June  1 1,200    0  days 0.000 


$3,040  $9,506 

Credits 

May  10 $600    22  days $2.20 

May  20 900    12  days 1.80 


$1,500  $4.00 

$3,040  —  $1,500  =  $1,540  balance  due  on  the  account. 

$9,506  —  $4  =  $5,506  balance  of  interest  due. 

Interest  on  $1,540  for  1  day  =  .2566. 

$5,506  divided  by  .2566  =  21.4  days  or  21  days. 

Counting  back  21  days  from  June  1  we  get  May  11,  the  equated  date. 

The  same  reasoning  should  be  applied  to  the  calculation  of  interest  on  the  debits  as  in  Problem  I.  Our 
reasoning  applying  to  the  credits  would  be  as  follows :  The  $600  paid  May  10  was  paid  22  days  before  the 
assumed  date  of  settlement,  the  debtor  being  entitled  to  interest  for  this  time  amounting  to  $2.20.  The 
$900  paid  on  May  20  or  12  days  before  settlement  date  entitles  the  debtor  to  $1.80  additional  interest.  This 
leaves  a  balance  of  $5,506  interest  due  from  the  debtor,  hence  the  account  should  have  been  settled  earlier 
as  calculated  above. 

If  the  balance  of  the  account  and  the  balance  of  the  interest  are  on  the  same  side,  the  debtor  owes  not 
only  the  balance  of  the  account  but  the  interest  thereon  as  well;  hence  he  should  have  settled  the  account 
earlier,  and  we  count  back  from  the  focal  date  to  find  the  equated  time. 

If  the  balance  of  the  account  and  the  balance  of  interest  are  on  opposite  sides,  the  debtor  has  the 
balance  of  interest  due  him,  and  has  the  right  to  delay  payment  of  the  account  beyond  the  focal  date ;  hence 
we  would  count  forward  to  find  the  equated  time. 

Problems 

101.  C  E.  Elbert  is  debited  on  the  books  of  William  L.  Abbott  with  the  following  items: 

1914 

Dec.    1  To  Mdse $450 

Dec.  15  To  Mdse 300 

Dec.  30  To  Mdse 150 

1915 

Jan.     8  To  Mdse 200 

Jan.  18  To  Mdse 300 

Find  the  equated  date  of  payment. 

102.  On  what  date  may  the  following  items  be  paid  in  one  amount  without  loss  of  interest  to  either 
party? 

Jan.  3     Mdse.,  30  da $600 

Jan.  14    Mdse.,  1  mo 900 

Jan.  20    Mdse.,  60  da 800 

Feb.  10     Mdse.,  90  da 300 

87 


103.  Find  the  equated  date  of  payment  of  the  following  account: 

E.  H.  ELDREDGE  &  CO. 

Aug.     5     To  Mdse   $200.00         Sept.     8     Cash   $240.00 

Aug-   20     To  Mdse.,  2  mo 360.00         Oct.      5     60-day  note  with  interest 250.00 

Sept.  15     To  Mdse.,  30  da 520.00 

104.  Find  the  equated  date  of  payment  of  the  following  account: 

GROVES  &  DAVIS 

Feb.  1     Mdse.,  net   $125.00  Feb.  8     Cash $100.00 

Feb.  11     Mdse.,  30  da 450.00  Feb.  15     Cash 500.00 

Mar.  20     Mdse.,  60  da 750.00  Mar.  25     Note  60  da.  with  interest 500.00 

Mar.  28     Mdse.,  30  da 1,000.00  Apr.  10  Note  30  da.  without  interest. .  1,000.00 

Apr.  5     Mdse.,  10  da 200.00 

105.  (From  Illinois  C.  P.  A.  Examination,  December,  1910.) 

A.  B.  &  Co.  of  Chicago  supply  goods  to  D.  D.  &  Co.  of  Bloomington  at  various  dates  and  the  latter 
offers  a  four  months  note  with  interest  at  5%  added  to  the  note  from  average  date;  the  invoices  are  as 
follows : 

August  14,  1911 $2,700 

September  5,  1911 3,950 

October  17,  1911 1,290 

November  12,  1911 780 

Draw  up  the  note,  dating  it  at  the  average  date. 

106.  (From  Colorado  C.  P.  A.  Examination,  December,  1913.) 
Find  the  average  date  of  payment  of  the  following: 

Apr.     5     Mdse $415.00         May    4     Cash $275.00 

May  21     Mdse 327.00         May  15     Cash 112.00 

107.  From  New  Jersey  C.  P.  A.  Examination.) 

What  is  the  equated  time  for  the  payment  of  the  balance  of  the  following  account? 

HENRY  M.  DOREMUS 

Mar.  16     Mdse.,  4  mo $444.57  July  1  Cash $400.00 

Mar.  30     Mdse.,  60  da 376.82  July  20  Cash 375.00 

Apr.  20     Mdse.,  30  da 712.19  Aug.  16  Cash 700.00 

May  17  .  Mdse.,  4  mo 628.75  Aug.  30  Cash 600.00 

May  28     Mdse.,  4  mo 419.31 

Doremus  desires  to  settle  the  above  account  on  September  13,  1904.  What  amount  of  money  should 
he  pay? 

108.  (From  Manitoba  C.  A.  Examination,  May,  1910.) 

Find  the  due  date  of  the  balance  of  the  following;  account,  and  what  amount  will  be  required  to  settle 
it  on  the  1st  day  of  May,  1910,  interest  being  charged  at  the  rate  of  6%  per  annum. 

Jan.     1  Mdse.,  30  da $800.00         Feb.      1     Cash $500.00 

Jan.  20  Mdse.,  30  da 500.00         Nov.  15     Cash 275.00 

Feb.     1  Mdse.,  30  "da 700.00 

Feb.  20  Mdse.,  30  da 600.00 


109.  (From  Maryland  C.  P.  A.  Examination,  January,  1909.) 
What  is  the  average  date  of  the  following  account? 

JAMES  HENDERSON 

Mar.   9     Mdse $300.00         Mar.  20     Cash $247.00 

May  12     Mdse 474.00        May   14    Cash 400.00 

June  19     Mdse 564.00        July    10     Cash 260.00 

110.  (From  Michigan  C.  P.  A.  Examination,  July,  1909.) 
What  is  the  average  date  of  the  following: 

a.  $114  due  Apr.  10;  $140  due  Apr.  26;  $320  due  May  22. 

b.  June  3,  $375  on  30  days  time ;  June  28,  $420  on  60  days  time ;  July  16,  $560  on  four  months  time ; 
September  4,  $228  on  90  days  time. 

c.  Dr.  May  16,  $437;  May  31,  $324;  Cr.  May  23,  $400;  June  16,  $300. 


89 


PART  XI 
SPECIAL  INVESTIGATIONS 

111.  (From  New  York  C.  P.  A.  Examination,  June,  1909.) 

A  firm  manufacturing  but  one  grade  of  cloaks,  insured  against  burglary,  claims  to  have  been  robbed  on 
the  night  of  September  10th. 

The  proof  of  the  loss  filed  by  the  assured  contained  two  items  for  600  cloaks,  $12,000;  silk,  1,000 
yards,  $1,500. 

An  inventory  of  the  stock  on  hand,  consisting  of  cloaks,  cloth  and  silk,  had  been  taken  January  1, 
amounting  to  $118,500,  the  particulars  of  which  have  been  lost  or  destroyed. 

An  analysis  of  the  firm's  books  produced  the  following  information: 

Purchase  of  cloth,  37,500  yards  at  $1.00.  . 

Purchases  of  silk,  10,000  yards  at  $2.00. 

6,000  cloaks  were  manufactured,  consuming,  cloth,  40,000  yards  at  $1.00;  silk,  10,000  yards  at  $2.00. 

9,000  cloaks  were  sold  between  January  1  and  September  10. 

Cost  of  sales,  per  cloak,  for  material $10.00 

Cost  of  sales,  per  cloak,  for  labor  and  sundries 7.00 

$17.00 

Inventory,  September  11,  2,500  cloaks  at $17.00 

12,500  yards  cloth  at 1.00 

5,000  yards  silk  at 2.00 

Prepare  a  report  proving  or  disapproving  the  claim. 

112.  (From  New  York  C.  P.  A.  Examination,  January,  1913.) 

Karl  Smith  is  a  real  estate  broker  and  agent  who,  among  other  things,  manages  properties  in  considera- 
tion of  commissions,  ranging  from  3%  to  5%  on  rent  collections.  For  the  last  two  years  his  books  have 
been  kept  in  haphazard  fashion  and  in  violation  of  the  law  of  agency.  They  are  incomplete  as  to  footings 
and  postings;  no  trial  balance  of  the  general  ledger  has  been  obtained  and  no  reconciliations  of  bank 
balances  has  been  established  during  the  above-mentioned  period.  The  tenants'  rent  book  is  a  species  of 
"tickler"  in  which  the  current  rent  charges  are  entered  in  pencil  and  inked  in  when  paid;  the  names  of  the 
tenants  of  properties  not  leased  are  also  entered  in  pencil  and  erased  when  the  tenants  move,  the  new 
names  being  entered  in  the  places  thus  left  vacant. 

Having  accidentally  discovered  irregularities  in  the  tenants'  book,  Karl  Smith  has  discharged  his  book- 
keeper-cashier and  engaged  an  accountant  to  conduct  an  examination  of  his  books,  records  and  accounts, 
discover  the  extent  of  the  shortage,  which  he  fears  is  considerable,  and  install  a  new  system  of  accounts. 

After  spending  considerable  time  in  an  attempt  to  place  the  books  on  an  accounting  basis,  the  accountant 
finally  obtains  the  following  trial  balance  of  the  ledger,  as  of  September  30,  1912,  installs  a  new  system 
which  will  permit  his  client  to  fulfil  his  accounting  duty  as  an  agent  and  renders  a  preliminary  report 
accompanied  by  a  statement  showing  clearly  the  financial  status  of  the  relations  of  Karl  Smith  to  his 
principals : 


90 


TRIAL  BALANCE 


Cash   $350.20 

Petty  cash 100.00 

The  Augusta  Terrace  (a) 216.00 

The  Victoria  Court  (a) 805.00 

The  St.  Quentin  Court  (a) 650.00 

The  Audubon  Court  (a) 270.00 

The  Evening  Despatch   (b) 75.00 

The  Morning  News  (b) 35.00 

The  Union  Wall  Paper  Co.  (b) 111.20 

The  Janitors'  Supplies  Co.  (b) 45.25 

Insurance  account  (c) 920.10 

Karl  Smith,  drawings  (d) 16,930.00 

Cash  shortage  (e) 380.00 

Salaries 12,140.00 

Office  expense 3,130.00 

Furniture  and  equipment 4,150.75 


Karl  Smith,  capital $4,360.40 

Commissions  22,510.00 

Phoenix  Ins.  Co 470.00 

London  Ins.   Co 450.10 

The  Frederic  Apartment  (f ) 2,385.30 

The  Venetian  Court  (f) 2,500.00 

The  Franklin  Castle  (f ) 3,231.00 

St.  Martin  Hall  (f ) 2,850.70 

Tenants 1,550.00 


$40,307.50 


$40,307.50 


Notations  by  the  accountant : 

a.  Remittances  on  account  of  collection  of  October  rents  paid  in  advance  upon  signing  lease,  not  as 
yet  credited  to  principals.    Settlements  to  be  made  on  the  29th  of  every  month. 

b.  Balances  represent  payments  from  March  to  June,  1912,  for  advertising,  decorating  and  supplies, 
for  the  account  of  managed  properties.  Paid  bills  cannot  be  found;  no  detail  available;  itemized 
receipted  bills  asked  for  by  letter ;  no  answer  at  September  30,  1912. 

c.  Premiums  on  fire  insurance  placed  by  agent  for  account  of  sundry  clients  not  principals.  Premiums 
will  be  paid  to  agent  if  risk  is  accepted  and  he  will  deduct  commissions  of  from  5%  to  15%  from 
settlement  with  companies. 

d.  Probably  contains  charges  which  might  properly  be  capitalized  under  caption  "Furniture  and 
Fixtures"  if  positive  information  were  available. 

e.  Entries  made  in  cash  book  by  accountant,  for  rent  collections  appearing  in  monthly  statements  to 
principals  but  not  appearing  in  cash  book  or  in  duplicate  of  bank  deposits  obtained  from  banks. 

f.  According  to  the  terms  of  his  employment  the  agent  must  remit  on  the  fifth  day  in  every  month. 

Prepare  the  preliminary  report  and  the  statement  submitted  by  the  accountant  to  Karl  Smith,  as  at 
September  30,  1912. 

113.     (From  Virginia  C.  P.  A.  Examination,  October,  1913.) 

A  lumber  company  issues  the  following  statement  and  one  of  the  stockholders  submits  it  to  you  as  he 
cannot  understand  how  135,000  ft.  sold  at  average  of  $8.15  per  M  can  produce  a  profit  of  $370.00  with  a 
cost  of  $6.50  per  M.  Make  your  report  with  reasons  why  the  statement  is  in  error  and  illustrate  with  a 
new  statement  of  operation  applying  the  inventories  where  they  correctly  belong  at  proper  value  and 
showing  the  cost  of  each  operation  and  the  cost  of  the  material  as  it  works  through  from  operation  to 
operation. 


PINE  TOP  LUMBER  COMPANY 

Statement  of  Operation — June  I,  1918 

Income 


Sales : 
100,000  ft.  rough  lumber. . . 
35,000  ft.  dressed  lumber. 


91 


Average 
Cost 
$750.00       $7.50 
350.00        10.00 


$1,100.00       $8.15 


Expense 

Average 
Logging  Cost 

400,000  ft $1,200.00       $3.00 

Hauling  to  mill 

300,000  ft 300.00  1.00 

Sawing  at  mill 

200,000  ft 300.00  1.50 

Planing 

50,000  ft 50.00  1.00 

$1,850.00       $6.50 
Less  Inventory  (Estimated  Value)  : 

100,000  ft.  logs  in  woods  at  $2.50 $250 

100,000  ft.  logs  at  mill  at  $4.00 400 

50,000  ft.  rough  lumber  at  $7.00 350 

15,000  ft.  dressed  lumber  at  $8.00 120 

; 1,120.00 

Cost  $730.00 

Profit 370.00 

$1,110.00 


92 


PART   XII 
MISCELLANEOUS 

114.     (From  Massachusetts  C.  P.  A.  Examination,  April,  1911.) 

Alfred  Avery,  while  solvent,  was  unable  to  continue  without  additional  credit;  his  condition  was  as 
follows : 


Assets 

Plant   

Cash 

Material — Raw  and  in  process. 

Finished  Goods 

Accounts  Receivable 


Liabilities 


$25,198 

212 

40,400 

6,070 

3,250 


Creditors 
Capital  . . 
Surplus  . 


$20,230 

50,000 

4,900 


$75,130 


$75,130 

His  creditors  decided  to  loan  him  $5,000  in  cash,  and  to  allow  him  additional  credit  for  necessary 
materials. 

His  subsequent  operations  were  as  follows: 

Purchases  on  book  account  charged  to  materials,  $5,100;  to  expense,  $12,000;  sales  on  book  account, 
$57,802;  losses  on  bad  debts,  $300;  loans  from  cred'tors,  $5,000;  receivables  collected,  $58,100;  cash  pay- 
ments for  labor,  $12,500;  for  expense,  $4,350;  for  plant,  $600;  paid  creditors,  $42,030;  personal  drawings, 
$3,000. 

There  remained  raw  material,  $4,000 ;  finished  goods,  $22,388. 

Prepare  cash  account,  working  account  and  balince  sheet  at  close  of  operation. 

115.     (From  Massachusetts  C.  P.  A.  Examination,  June,  1912.) 

The  trial  balance  of  the  A.  B.  Co.  on  January  1,  1912,  appears  as  follows: 


Cash $50,100 

Accounts  receivable,  gross 400,000 

Notes  receivable  30,000 

Merchandise    inventory,    Jan.    1,    1911, 

gross    240,000 

Merchandise  purchases  to  Jan.  1,  1912.  .  1,250,000 

Prepaid  interest,  Jan.  1,  1911 12,500 

Interest,  paid  to  Jan.  1,  1912 36,000 

Expenses,  paid  to  Jan.  1,  1912 156,000 

Reserve  for  disc,  accts.  pay.,  Jan.  1,  1911  4,000 

Bad  debts,  charged  off  to  Jan.  1,  1912. . .  2,500 

Returned  sales  customers 100,000 

Salaries 20,000 

Taxes 5,000 

Plant   250,000 

Discounts  allowed  customers 51,900 


Reserve  for  disc,  accts.  receivable,  Jan 
1,  1911 

Reserve  for  disc.  mdse.  inventory,  Jan 
1,1911 

Accounts  payable 

Notes  payable 

Sales 1,500,000 

Purchase  discounts,  collected  on  settle- 
ments with  creditors 

Reserve  for  bad  debts,  Jan.  1,  1911 

Mdse.  returned  to  creditors  to  Jan.  1, 
1912 

Collected  on  accts.  charged  to  P.  &  L.  in 
1910 

Credit  insurance,  received  on  1910  losses 

Profit  and  Loss,  Jan.  1,  1911 


$12,000 

12,000 

90,000 

600,000 


59,500 
3,000 

50,000 

500 

1,000 

55,000 


Capital  stock 225,000 


$2,608,000 


$2,608,000 


The  following  information  is  stated: 

Accounts  Payable,  January  1,  1911,  Gross,  $80,000. 

Accounts  Receivable,  January  1,  1911,  Gross,  $300,000. 

Notes  Payable,  January  1,  1911,  $500,000.    Interest  paid  at  5%  to  July  1,  1911. 

On  July  1,  1911,  $500,000  is  renewed  at  6%   for  1  year  and  $100,000  additional  is  borrowed  at 

same  rate  for  one  year. 
Inventory,  January  1,   1912,  $320,000  Gross. 
Goods  bought  on  terms  of  5%  30  days. 
Goods  sold  on  terms  of  4%  30  days. 
Reserve  for  Bad  Debts,  January  1,  1912,  to  be  1%  on  Gross  Accounts  Receivable. 

93  "^ 


Submit :  a.     Working  Account  showing  Operating  Profit. 

b.  Profit  and  Loss  Account. 

c.  Balance  Sheet. 

116.     (From  Massachusetts  C.  P.  A.  Examination,  October,  1914.) 

The  books  of  the  X  Manufacturing  Company  were  audited  to  December  31,  1913,  and  in  making  up 
the  Balance  Sheet  and  Profit  and  Loss  Account  at  that  date  the  auditors  recommended  the  following 
adjustments : 

a.  Transferred  to  Profit  and  Loss,  $4,231.07,  which  had  been  charged  to  real  estate  and  buildings 
in  error. 

b.  Provided  for  depreciation  of  buildings,  etc.,  $7,200. 

c.  Adjusted  salaries  amounting  to  $1,400.00  due  for  1913  services,  but  not  entered  on  the  books  until 
January,  1914. 

d.  Reduced  the  amount  of  Inventory  because  of  errors,  $12,000. 

The  same  auditors  were  again  called  in  to  audit  the  books  to  June  30,  1914,  and  found  that  the  above 
adjustments  had  not  been  entered  in  the  books.  They  also  found  that  during  the  half  year  $1,000.00  had 
been  charged  to  real  estate,  buildings,  etc.,  instead  of  to  expense ;  that  no  provision  had  been  made  for  depre- 
ciation for  the  period  amounting  to  $3,600.00  and  that  the  inventory  had  been  footed  $10,000.00  too  much. 
Also  that  the  unexpired  insurance  amounted  to  $750.00  more  than  was  entered  on  the  books.  The  follow- 
ing are  condensed  trial  balances  of  the  X  Manufacturing  Company  books  as  the  auditor  found  them  as  of 
December  31,  1913,  and  June  30,  1914: 

December  31,1913  June  30,  1914 

Real  Estate,  Buildings,  etc $102,840.26  $115,226.80 

Capital  Stock $200,000.00  $200,000.00 

Debentures  100,000.00  100,000.00 

Cash 14,672.14  22,143.21 

Accounts  Payable  9,431.17  11,698.21 

Accounts  Receivable 22,436.10  28,250.40 

Loans 10,000.00  5,000.00 

Stocks  and  Bonds 17,502.50  19,150.00 

Inventory    246,153.42  288,360.14 

Unexpired  Insurance  1,471.23  742.26 

Surplus   85,644.48  85,644.48 

Profit  and  Loss  1914 71,530.12 


$405,075.65  $405,075.65  $473,872.81  $473,872.81 

From  the  foregoing  facts  prepare : 

1.  A  correct  Balance  Sheet  June  30,  1914. 

2.  State  the  adjusted  amount  of  profits  for  the  half  year  to  June  30,  1914. 

3.  Prepare  statement  reconciling  the  Balance  Sheet  figures  with  the  original  Trial  Balance  of 
June  30,  1914. 

117.     (From  Massachusetts  C.  P.  A.  Examination,  October,  1914.) 

A  Trading  Stamp  Company  sells  its  stamps  for  $5.00  per  M.  They  redeem  these  stamps  in  cash  for 
$4.00  per  M.  or  in  premiums  which  average  to  cost  $4.50  per  M.  The  income  on  the  investments  is  $8,748 
per  year.  They  estimate  that  5%  of  the  stamps  sold  will  lapse  and  never  be  redeemed.  They  anticipate  the 
profit  at  the  rate  of  10%  on  the  balance  of  stamps  sold  after  deducting  the  redemptions  and  estimated 
lapses. 


94 


The  Trial  Balance  of  January  31,  ISIS,  LS  as  follow- 

Balances — January  31,  1913: 

Cash $23,510.00 

Stamps  on  hand  at  cost 1,525.00 

I  nvestments  in  Bonds 152,825.00 

Good  will 100,000.00 

Premiums  at  cost 38,710.00 

Capital $100,000.00 

Accounts  Payable 6,010.00 

Balances — January  31,  1913,  which  have  not  changed  since  Dec.  31,  1913,  and  are 
to  be  adjusted  by  the  January  operations : 

Accrued  Interest 2,4?5.00 

Lapses 76,388.00 

Anticipated  Profits   23,577.00 

Unredeemed  Stamps 31 2,158.00 

Surplus   , 8,717.00 

Balances — January  31,  1913,  showing  operations  for  January: 

!>,<;< (0,000  Stamps  redeemed  in  January  in  premiums   43,200.00 

4,912,500  Stamps  redeemed  in  January  in  cash  19,650.00 

Stamps  sold  in  January 05,000.00 

Expenses  January 10,525.00 

Coupons  collected  in  January 500.00 

$492,385.00  $492,385.00 

Submit  an  operating  account  and  profit  and  loss  account  for  the  month  of  January  and  a  balance  sheet 
January  31,  1913. 

118.     (From  Massachusetts  C.  P.  A.  Examination,  October,  1915.) 

"A"  is  a  manufacturer  of  carpets  and  his  balance  sheet  at  December  31,  1913,  is  as  follows: 

Assets 

•  asfa  in  Hank $815.00 

Real  Estate 20,000.00 

Machinery    40,000.00 

Accounts  Receivable 7,227.50 

Inventory— Finished  Goods 11,000.00 

Inventory — Goods  in  Process 850.00 

Inventory — Raw  Materials  and  Supplies 107.50 

$80,000.00 

Liabilities 

Notes  Payable  $22,000.00 

Account-  Payable   28,000.00 

Capital  Account 30,000.00 

$80,000.00 

"A"  ■frees  with  "i:  *  to  BeU  him  one-half  interest  in  the  business  for  the  sum  of  $20,000  to  be  contrib- 
uted to  the  new  firm,  the  new  firm  to  take  over  the  assets  of  "A"  with  exception  of  real  estate  as  of  Decem- 
ber 31.  1913,  and  assume  all  its  liabilities.  The  Goodwill  of  the  business  of  "A"  should  be  rated  at  $20,000 
in  the  new  books, 

It  was  discovered  shortly  after  the  commencement  of  business  of  the  new  firm  that  the  inventory  of 
finished  stock  was  incorrect  and  that  the  value  should  have  been  stated  at  $8,500  instead  of  $11,000,  and 
that  of  the  Accounts  Receivable  only  0  was  collectable,  one  of  the  debtors  having  failed  and  ab- 

ded,  leaving  no  assets,  previous  to  the  formation  of  the  partnership,  which  fact  was  known  to  "A"  and 

95 


his  bookkeeper  had  been  instructed  to  charge  off  the  account  but  had  failed  to  do  so.     No  correction  had 
been  made  of  these  discrepancies,  and  the  trial  balance  at  the  end  of  the  year's  business  showed  as  follows : 

"A"  Capital  Account . . . . $25,000.00 

"B"  Capital  Account 25,000.00 

"A"  Personal  Account 3,100.00 

"B"  Personal  Account 3,100.00 

Merchandise 78,000.00 

Accounts  Receivable 15,400.00 

Expense 1,500.00 

Machinery  . . , 40,000.00 

Manufacturing  Expense 22,000.00 

Wages 44,000.00 

Rent 1,500.00 

Profit  and  Loss. 600.00 

Accounts  Payable 45,200.00 

Cash 22,000.00 

Goodwill 20,000.00 

$173,200.00  $173,200.00 
The  Inventory  at  close  of  the  year  December  31 ,  1914,  was : 

Finished  Goods $28,000.00 

Goods  in  Process .' 1,500.00 

Raw  Material  and  Supplies 1,500.00 

$31,000.00 

No. amount  has  been  charged  off  for  depreciation  of  machinery,  which  should  be  10%. 
Make  proper  entries  to  correct  books  and  formulate  balance  sheet  showing  the  standing  of  the  firm 
December  31,  1914. 


96 


THIS  BOOK  IS  DUE  ON  THE  LAST  DATE 
STAMPED  BELOW 

AN  INITIAL  FINE  OF  25  CENTS 

WILL  BE  ASSESSED   FOR   FAILURE  TO   RETURN 
THIS   BOOK   ON   THE   DATE   DUE.   THE   PENALTY 

w.Ll  Increase  to  so  cents  on  the  fourth 

DAY  AND  TO  *t.OO  ON  THE  SEVENTH  DAY 

OVERDU'  r  35  my 


25  1939 


-A^e-4^— — 


-REG^B-bD 


OCT  18  1956 


LD  21-95rn-7,'37 


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